UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
☐ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR |
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31 |
OR |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________ |
OR |
☐ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of event requiring this shell company report |
Commission file number: 001-39570
TIM S.A.
(Exact name of Registrant as specified in its charter)
TIM, Inc.
(Translation of Registrant’s name into English)
THE FEDERATIVE REPUBLIC OF BRAZIL
(Jurisdiction of incorporation or organization)
João Cabral de Melo Neto Avenue, 850 – South Tower – 12th12th floor
22775-057, Rio de Janeiro, RJ, Brazil
(Address of principal executive offices)
Adrian Calaza
Alberto Mario Griselli
Chief FinancialExecutive Officer and Investor Relations Officer
TIM S.A.
João Cabral de Melo Neto Avenue, 850 – NorthSouth Tower – 12th12th floor
22775-057, Rio de Janeiro, RJ, Brazil
Tel: 55 21 4109-4167
ri@timbrasil.com.br
(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Shares, without par value* | New York Stock Exchange | |
American Depositary Shares, as evidenced by American Depositary Receipts, each representing five Common Shares | TIMB | New York Stock Exchange |
* | Not for trading, but only in connection with the listing of American Depositary Shares on the New York Stock Exchange |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
Title of Class | Number of Shares Outstanding |
Common Shares, without par value |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes☒ No ☐
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes ☐No☒
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer☒ Accelerated Filer ☐ Non-accelerated Filer ☐ Emerging growth company ☒☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b). ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
☐ U.S. GAAP
☒International Financial Reporting Standards as issued by the International Accounting Standards Board
☐ Other
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
☐Item 17 ☐Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐No☒
Page
i |
Presentation of FINANCIAL AND OTHER Information
In this annual report, TIM S.A. (formerly known as Intelig Telecomunicações Ltda., or “Intelig”), a publicly held company (sociedade anônima) organized under the laws of the Federative Republic of Brazil, is referred to as “TIM” or the “Company”. References to “we,” “us” and “our” are to TIM together with, where the context so requires and as explained more fully below, Cozani RJ Infraestrutura e Rede de Telecomunicações S.A. (“SPE Cozani”) which was merged into the company on April 1, 2023, TIM Participações S.A. (“TIM Participações”), our prior parent holding company, which was merged into the company in September 2020, TIM Celular S.A. (“TIM Celular”), which was merged into the Company in October 2018, TIM Sul S.A. (“TIM Sul”) and TIM Nordeste Telecomunicações S.A. (“TIM Nordeste”), both of which merged into the Company in May 2005. Collectively, these transactions are referred to herein as the Reorganization.
References in this annual report to the “common shares” are to the common shares of TIM. References to the “American Depositary Shares” or “ADSs” are to TIM’s American Depositary Shares, each representing five common shares. The ADSs are evidenced by “American Depositary Receipts,” or “ADRs,” which are listed on the New York Stock Exchange, or the NYSE,“NYSE”, under the symbol “TIMB.”
Market Share Data
We calculate market share information based on information provided by Brazil’s National Telecommunications Agency (Agência Nacional de Telecomunicações), or Anatel. (“Anatel”). We calculate penetration data based on information provided by the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística), or IBGE. (“IBGE”).
Presentation of Financial Information
We maintain our books and records in reais. The consolidated financial statements included in this annual report were prepared in accordance with International Financial Reporting Standards or IFRS,(“IFRS”), as issued by the International Accounting Standards Board or IASB.(“IASB”) (“consolidated financial statements”). As a complement to the IFRS principles, the Company also applies accounting practices established under Brazilian corporate law and rules issued by the Securities and Exchange Commission of Brazil (Comissão de Valores Mobiliários) (“CVM”), or CVM, for the Brazilian Stock Market Exchange and Anatel to comply with the regulatory requirements. The selected financial information for the Company included in “Item 3. Key Information—A. Selected Financial Data” should be read in conjunction with, and is qualified in its entirety by, the IFRSconsolidated financial statements of the Company and “Item 5. Operating and Financial Review and Prospects” appearing elsewhere in this annual report.
The Merger, which occurred in 2020, as defined below, was accounted using the predecessor method of accounting, through which the historical operations of TIM Participações are deemed to be those of the Company. See “Item 4. Information on the Company—A. History and Development of the Company—Historical Background.” Accordingly, the consolidated financial statements included in this report reflect:
· | the historical operating results and financial position of TIM Participações prior to the Merger; |
· | the consolidated results of the Company and TIM Participações following the |
· | the balances as of and for the year ended December 31, 2020 represent consolidated amounts; |
· | on November 16, 2021, we sold 51% of the share capital of our subsidiary, I-Systems (formerly FiberCo) to IHS and thereafter we no longer had any subsidiaries. As such, the balances as of and for the year ended December 31, 2021 represent individual amounts; and |
· | on April 20, 2022, we acquired 100% of the share capital of SPE Cozani and it became our subsidiary. As such, the balances as of and for the year ended December 31, 2022 represent consolidated amounts. |
The preparation of financial statements in conformityaccordance with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying our accounting policies. Those areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in Note 3 to our consolidated financial statements.
ii |
All references herein to the “real,” “reais” or “R$” are to the Brazilian real, the official currency of Brazil. All references to “U.S. dollars,” “dollars” or “U.S.$” are to United States dollars.
Solely for the convenience of the reader, we have translated some amounts included in “Item 3. Key Information—A. Selected Financial Data” and elsewhere in this annual report from reais into U.S. dollars using the commercial selling exchange rate as reported by the Central Bank of Brazil (Banco Central do Brasil) (“Central Bank”), or Central Bank, aton December 31, 20202022 of R$5.195.218 to U.S.$1.00. These translations should not be considered representations that any such amounts have been, could have been or could be converted into U.S. dollars at that or at any other
exchange rate. Such translations should not be construed as representations that the real amounts represent or have been or could be converted into U.S. dollars as of that or any other date. See “Item 3. Key Information—A. Selected Financial Data—Exchange Rates” for information regarding exchange rates for the Brazilian currency.
Certain figures included in this annual report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be an arithmetic aggregation of the figures that precede them.
The “Technical Glossary” at the end of this annual report provides definitions of certain technical terms used in this annual report and in the documents incorporated in this annual report by reference.
This annual report contains statements in relation to our plans, forecasts, expectations regarding future events, strategies and projections, which are forward-looking statements and involve risks and uncertainties and are therefore, not guarantees of future results. Forward-looking statements speak only as of the date they were made, and we undertake no obligation to update publicly or revise any forward-looking statements after we file this annual report because of new information, future events and other factors. We and our representatives may also make forward-looking statements in press releases and oral statements. Statements that are not statements of historical fact, including statements about the beliefs and expectations of our management, are forward-looking statements. Words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “plan,” “predict,” “project” and “target” and similar words are intended to identify forward-looking statements, which necessarily involve known and unknown risks and uncertainties. Our actual results and performance could differ substantially from those anticipated in our forward-looking statements. These statements appear in a number of places in this annual report, principally in “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects,” and include, but are not limited to, statements regarding our intent, belief or current expectations with respect to:
· |
general economic, political, social and business conditions in Brazil, including the impact of the current international economic environment and the macroeconomic conditions in Brazil including the recent Brazilian presidential election of 2022 and the |
· | Brazilian telecommunications industry conditions, size and trends; |
· | characteristics of competing networks’ products and services; |
· | estimated demand forecasts; |
· | actual or threatened health epidemics, pandemics, outbreaks, or other public health crises, including COVID-19, could have an adverse impact on our business; |
· | the size of our subscriber base, particularly any increase in our postpaid subscribers; |
· | development of additional sources of revenue; |
· | strategy for marketing and operational expansion; |
· | achieving and maintaining customer satisfaction; |
iii |
· | development of higher profit margin activities, attaining higher margins, and controlling customer acquisition and other costs; and |
· | capital expenditures forecasts, funding needs and financing resources. |
Because forward-looking statements are subject to risks and uncertainties, our actual results and performance could differ significantly from those anticipated in such statements and the anticipated events or circumstances might not occur. The risks and uncertainties include, but are not limited to:
· | our ability to successfully implement our business strategy; |
· | increasing competition from other providers and services in the telecommunications industry, particularly global and local Over The Top |
· | the trend towards consolidation in the Brazilian telecommunications market; |
· | our ability to respond to new telecommunications technologies that are received favorably by the |
· | our ability to efficiently operate our systems and controls that are subject to failure or to cyber-security risks; |
· | our ability to expand our services while maintaining the quality of the services provided and a positive customer experience; |
· | our ability to operate efficiently and to refinance our debt as it comes due, particularly in consideration of political and economic conditions in Brazil and uncertainties in credit and capital markets, such as in the context of the ongoing COVID-19 |
· | performance of |
· | government policy and changes in the regulatory environment or in the legal framework in Brazil, particularly as an economic group classified as having significant market power in some markets subject to increased regulation; |
· | our dependence on authorizations granted and renewed by the Brazilian government; |
· | the effect of economic and political conditions, such as inflation and exchange rate fluctuations; |
· | the growing requirements and new regulations and standards regarding Environmental, Social and Governance (“ESG”) disclosure could generate yet to be identified obligations and expenditures; and |
· | other factors identified or discussed under “Item 3. Key Information—D. Risk Factors” and elsewhere in this annual report. |
iv |
Item 1. | Identity of Directors, Senior Management and Advisers |
Not applicable.
Item 2. | Offer Statistics and Expected Timetable |
Not applicable.
Item 3. | Key Information |
A. [Reserved]
Selected Financial Data
The selected financial data presented below should be read in conjunction with our audited consolidated financial statements, including the notes thereto.thereto, included elsewhere in this annual report. Our consolidated financial statements included herein, the consolidated balance sheets as of December 31, 2020,2022 and 2021 and for each of the results of operations and cash flows forthree years in the yearperiod ended December 31, 20202022 have been audited by Ernst & Young Auditores Independentes S.S.S/S Ltda. (“EY”). The audit report of Ernst & Young Auditores Independentes S.S.S/S Ltda. on such consolidated financial statements appearappears elsewhere in this annual report.
Our consolidated financial statements included herein and the selected consolidated financial data as of December 31, 2022and 2021 and for the yearyears ended December 31, 20202022, 2021 and 20192020 derive from the respective year-end audited consolidated financial statements audited by Ernst & Young Auditores and for the year ended December 31, 2018, derive from the year-end financial statements audited by PricewaterhouseCoopers Auditores Independentes.statements.
The following table presents a summary of our historical consolidated financial and operating data for each of the periods indicated. Solely for the convenience of the reader, real amounts as of and for the year ended December 31, 20202022, have been translated into U.S. dollars at the commercial market rate in effect on December 31, 20202022 (as reported by the Central Bank of R$5.195.218 to U.S.$1.00). See “—Exchange Rates” for information regarding exchange rates for the Brazilian real. You should read the following information together with our consolidated financial statements and the notes thereto included elsewhere in this annual report and with “Item 5. Operating and Financial Review and Prospects.”
1 |
As of and for the Year Ended December 31, | As of and for the Year Ended December 31(2), | |||||||
2020 | 2020 | 2019 | 2018 | 2022 | 2022 | 2021 | 2020 | |
(in thousands, unless otherwise indicated) | (in thousands, unless indicated otherwise) | |||||||
Income Statement Data: | ||||||||
Revenue | 3,327,131 | 17,267,812 | 17,377,194 | 16,981,329 | 4,126,255 | 21,530,801 | 18,058,027 | 17,267,812 |
Cost of services provided and goods sold | (1,540,774) | (7,996,615) | (7,433,731) | (7,701,418) | (2,042,158) | (10,655,981) | (8,443,023) | (7,996,615) |
Gross income | 1,786,358 | 9,271,197 | 9,943,463 | 9,279,911 | 2,084,097 | 10,874,820 | 9,615,004 | 9,271,197 |
Operating income (expenses) | ||||||||
Selling expenses | (856,075) | (4,443,027) | (4,986,289) | (4,970,780) | (1,072,482) | (5,596,211) | (4,621,788) | (4,443,027) |
General and administrative expenses | (322,407) | (1,673,290) | (1,717,859) | (1,608,319) | (346,634) | (1,808,735) | (1,723,384) | (1,673,290) |
Share of loss of an associate | (11,803) | (61,587) | (11,572) | - | ||||
Other income (expenses), net | (68) | (351,854) | 1,275,542 | (283,289) | (47,599) | (248,371) | 497,771 | (351,854) |
Operating income | 540,082 | 2,803,026 | 4,514,857 | 2,417,523 | ||||
Financial income (expenses) | (156) | (810,622) | 21,210 | (537,333) | ||||
Income before income and social contribution taxes | 383,893 | 1,992,404 | 4,536,067 | 1,880,190 | ||||
Income and social contribution taxes | (32) | (164,150) | (913,940) | 664,911 | ||||
Net income for the year | 352,265 | 1,828,254 | 3,622,127 | 2,545,101 | ||||
Basic earnings per share | 0.02 | 0.08 | 1.50 | 1.05 | ||||
Diluted earnings per share | 0.02 | 0.08 | 1.50 | 1.05 | ||||
Profit before financial income and expenses | 605,580 | 3,159,916 | 3,756,031 | 2,803,026 | ||||
Financial income (expenses) and foreign exchange variations, net | (275,778) | (1,439,008) | (652,806) | (810,622) | ||||
Profit before income tax and social contribution | 329,802 | 1,720,908 | 3,103,225 | 1,992,404 | ||||
Income tax and social contribution | (9,611) | (50,153) | (146,051) | (164,150) | ||||
Profit for the year | 320,191 | 1,670,755 | 2,957,174 | 1,828,254 | ||||
Basic earnings per share (in R$/U.S.$ per share) | 0.13 | 0.69 | 1.22 | 0.76 | ||||
Diluted earnings per share (in R$/U.S.$ per share) | 0.13 | 0.69 | 1.22 | 0.76 | ||||
Number of shares outstanding: | ||||||||
Common shares (in millions) | 22,026 | 2,421 | 2,420 | |||||
Dividends per share | 0.07 | 0.38 | 0.35 | 0.30 | 0.14 | 0.74 | 0.37 | 0.38 |
Balance Sheet Data: | ||||||||
Property, plant, equipment and intangibles assets | 5,226,931 | 27,127,773 | 27,280,490 | 21,885,626 | 7,489,019 | 39,077,700 | 28,893,479 | 27,127,773 |
Total assets | 8,025,899 | 41,654,417 | 40,348,924 | 31,957,889 | 10,810,342 | 56,408,367 | 49,819,186 | 41,654,417 |
Leases, Loans and Financing | 2,066,256 | 10,723,867 | 9,809,958 | 3,603,091 | 3,411,592 | 17,801,690 |
12,909,004 | 10,723,867 |
Shareholders’ equity | 4,466,810 | 23,182,745 | 22,431,818 | 19,794,837 | 4,867,260 | 25,397,365 | 25,107,106 | 23,182,745 |
Capital stock | 2,596,896 | 13,477,891 | 9,866,298 | |||||
Cash Flow Data: | ||||||||
Share capital | 2,582,961 | 13,477,891 | 13,477,891 | 13,477,891 | ||||
Cash Flows Data: | ||||||||
Operating Activities: | ||||||||
Net cash from operations | 1,671,266 | 8,673,871 | 7,064,726 | 6,129,387 | ||||
Net cash flows from operating activities | 1,807,028 | 9,429,075 | 10,078,087 | 8,673,871 | ||||
Investing Activities: | ||||||||
Net cash from investment activities | (1,019,914) | (5,293,356) | (3,712,642) | (3,830,420) | ||||
Net cash flows used in investing activities | (1,651,963) | (8,619,945) | (6,689,396) | (5,293,356) | ||||
Financing Activities: | ||||||||
Net cash from financing activities | (595,236) | (3,089,273) | (2,142,804) | (4,184,155) | ||||
Increase (decrease) in cash and cash equivalents, net | 56 | 291,242 | 1,209,280 | (1,885,188) | ||||
Net cash flows used in financing activities | (668,653) | (3,489,032) | (735,366) | (3,089,273) | ||||
Increase (decrease) in cash and cash equivalents | (513,587) | (2,679,902) | 2,653,325 | 291,243 | ||||
Cash and cash equivalents at the beginning of the year | 440,086 | 2,284,048 | 1,075,530 | 2,960,718 | 1,002,034 | 5,228,615 | 2,575,291 | 2,284,048 |
Cash and cash equivalents at end of the year | 496,202 | 2,575,290 | 2,284,810 | 1,075,530 | ||||
Cash and cash equivalents at the end of the year | 488,446 | 2,548,713 | 5,228,615 | 2,575,291 |
(1) |
(2) | The balances for the years ended December 31, 2022 and 2020 represent consolidated amounts. On November 16, 2021, we sold 51% of the |
2 |
Brazilian Economic Environment
Our business, prospects, financial condition and results of operations are dependent on general economic conditions in Brazil. The table below sets forth data regarding gross domestic product or GDP,(“GDP”), inflation, interest rates and real/U.S. dollar exchange rates in the periods indicated:
2020 | 2019 | 2018 | 2022 | 2021 | 2020 | |
GDP growth (contraction) (%)(1) | (4.1) | 1.1 | 1.3 | 2.9 | 4.5 | (4.1) |
Inflation (deflation) – IGP-M (%)(2) | 23.14 | 7.30 | 7.34 | 5.45 | 17.47 | 23.14 |
Inflation (deflation) – IPCA (%)(3) | 4.52 | 4.31 | 3.75 | 5.62 | 10.06 | 4.52 |
SELIC (%)(4) | 2.00 | 4.50 | 6.50 | 13.75 | 9.25 | 2.00 |
DI Rate (%)(5) | 1.90 | 4.40 | 6.40 | 12.39 | 4.43 | 1.90 |
TJLP (%) (6) | 4.55 | 5.57 | 6.98 | 7.2 | 5.32 | 4.55 |
Appreciation (devaluation) of the real against the U.S. dollar (%) | (29.34) | (4.02) | (18.50) | 6.5 | (7.4) | (29.34) |
Exchange rate (closing) – R$ per U.S.$1.00 | 5.1967 | 4.0307 | 3.8748 | 5.2171 | 5.5805 | 5.1967 |
Average exchange rate – R$ per U.S.$1.00(7) | 5.1612 | 3.9453 | 3.6558 | 5.1653 | 5.3950 | 5.1612 |
(1) Brazilian GDP was calculated using the new procedures adopted by the IBGE.
(2) The General Market Price Index (Índice Geral de Preços do Mercado), or IGP-M, as measured by Fundação Getulio Vargas, or FGV, represents data accumulated over the 12 months in each year ended December 31.
(3) The National Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo), or IPCA, as measured by IBGE, represents data accumulated over the 12 months in each year ended December 31.
(4) This is the average adjusted rate of daily financing determined in the Special Settlement and Custody System (Sistema Especial de Liquidação e Custódia), or SELIC, for Brazilian federal securities (end of period).
(5) The DI rate is the end of period interbank deposit rate in Brazil.
(6) The long-term interest rate (Taxa de Juros de Longo Prazo), or TJLP, represents the interest rate applied by the Brazilian Development Bank (Banco Nacional de Desenvolvimento Econômico e Social), or BNDES, in long-term financings (end of the period).
(7) Average exchange rate of each year.
(1) | Brazilian GDP was calculated using the new procedures adopted by the IBGE. |
(2) | The General Market Price Index (Índice Geral de Preços do Mercado) (“IGP-M”), as measured by Fundação Getulio Vargas (“FGV”), represents data accumulated over the 12 months in each year ended December 31. |
(3) | The National Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo) (“IPCA”), as measured by IBGE, represents data accumulated over the 12 months in each year ended December 31. |
(4) | This is the average adjusted rate of daily financing determined in the Special Settlement and Custody System (Sistema Especial de Liquidação e Custódia) (“SELIC”), for Brazilian federal securities (end of period). |
(5) | The DI rate is the end of period interbank deposit rate in Brazil. |
(6) | The long-term interest rate (Taxa de Juros de Longo Prazo) (“TJLP”), represents the interest rate applied by the Brazilian Development Bank (Banco Nacional de Desenvolvimento Econômico e Social) (“BNDES”), in long-term financings (end of the period). |
(7) | Average exchange rate of each year. |
Sources: BNDES, Central Bank, Bloomberg, FGV and IBGE.
In contrast with 2019, which was marked by the improvement of the Brazilian economy andSimilar to 2021, 2022 continued recovery of GDP, 2020 was definedto be significantly impacted by the COVID-19 pandemicpandemic. Following the commencement of wide scale vaccination globally in late 2020, and itswith the advance of vaccination in Brazil throughout 2021 and 2022, combined with the consequent societal and economic impacts, which contributed to a declineeasing of mobility restrictions, Brazil’s gross domestic product (GDP) grew by 2.9 % in GDP of 4.1%, related to government lock-down and social distancing measures during the year that resulted in general declines in business levels and trade. The2022. Brazilian trade balance closed the year with a surplus of U.S.$50.9 billion, representing a growth of 8.3%flow grew 21.5% compared to 2019. Of note was2021, and reached US$ 607.7 billion in 2022. It is worth mentioning the -10.4% decrease19.3% increase in imports that mostly offsetand the -6.9% decrease24.3% increase in exports. Inflation, measured by the IPCA, achieved 4.52%reached 5.62%, its highest annual rate since 2016, exceeding the midpoint of the target set by the Central Bank, which was 4.00%3.5% for the year. The performance is explained byAmong the impactsfactors that impacted such result, the food industry recorded an increase of the growth of foods and beverages prices, driven by the strong demand for these products, the rise of dollar and the prices of commodities11.6%, compared to 7.9% in the international market.previous year, as a result of worse weather conditions during the period. Increases in commodity prices, mainly oil, also played a role in pushing inflation above the target ceiling for the second year in a row. The SELIC, or basic interest rate, was further reduced inlowered progressively to 2.00% on August 5, 2020 before increasing again and closed the year at a historical lowreaching 13.75% as of 2.0%, a continued reduction of 2.5 percentage points compared to the SELIC rate of 4.5% at the end of 2019.December 31, 2022. This movement is explained by stimulus measures being undertaken to prompt an economic recovery following lock-down measures implemented by the government in response to the COVID-19 pandemic and a temporarythe impact of high inflation impact expectation.which followed. The Brazilian government and Central Bank have taken and will likely continue to take actions to change or adjust economic policies as a reaction to turmoil in the financial markets and increased volatility caused by the COVID-19 outbreak.
Despite the overall positive economic impact of the approval of the public pension reform, instabilityInstability has continued to characterize Brazil’s political environment, leading to uncertainties regarding the approval of other necessary reforms such as fiscaltax and politicaladministrative reforms. We cannot predict the effects of further political developments on the
Brazilian economy, including the policies that President Jair BolsonaroLuis Inácio Lula da Silva and his economic team will submit for congressional analysis,to Congress during his term in office, which may be approved or not and mightmay affect our business and the Brazilian economy.
3 |
In Europe, levels of economic activity entered a slower growth trajectory, as the war between Russia and Ukraine, political tensions within the Eurozone and the effects of the United Kingdom formally leaving the European Union on January 31, 2020, or Brexit, continue. The United Kingdom is expected to continue to follow certain European Union rules during the transition period; however, the ongoing process of negotiations between the United Kingdom and the European Union will determine the future terms of the United Kingdom’s relationship with the European Union, including access to European Union markets, either during a transitional period or more permanently (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, it is unclear the degree to which current political divisions in the country will continue intothroughout the nextcurrent four-year presidential term of President Biden, as well as the policies that will be adopted by a new presidentialthe current administration and the effects of any such policies, if implemented.
Exchange Rates
In respect ofrelation to foreign exchange, the Brazilian real depreciated 28% appreciated 6.5% compared to the U.S. dollar in 2020. During the year, the exchange rate showed2022, primarily as a depreciationresult of the real since December 31, 2019 due primarily to the impact of uncertainties regarding inflation in the COVID-19 pandemic onUnited States and external factors such as the Brazilian economyongoing war between Russia and the uncertainties related to the Brazilian fiscal policy.Ukraine. There can be no assurance that the real will not appreciate or further depreciate against the U.S. dollar or other currencies in the future.
In the past, the Brazilian government has implemented various economic plans and utilized a number of exchange rate policies, including sudden devaluations, periodic mini-devaluations during which the frequency of adjustments ranged from a daily to a monthly basis, floating exchange rate systems, exchange controls and dual exchange rate markets. Since 1999, the Central Bank has allowed the real/U.S. dollar exchange rate to float freely, and, since that time, the real/U.S. dollar exchange rate has fluctuated considerably. We cannot predict whether the Central Bank or the Brazilian government will continue to let the real float freely or intervene in the exchange rate market by returning to a currency band system or otherwise. The real may depreciate or appreciate substantially against the U.S. dollar.
During the first part of 2021,2023, the real continued to depreciate considerablyappreciated as compared to the U.S. dollar. On April 29, 2021,27, 2023, the selling real/dollar exchange rate was R$ 5.3665.015 to U.S.$1.00. The real/dollar exchange rate fluctuates and, therefore, the selling rate aton April 29, 202127, 2023 may not be indicative of future exchange rates.
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Summary of Risk Factors
This section is intended to be a summary of more detailed discussions contained elsewhere in this annual report. The risks described below are not the only ones we face. Our business, results of operations or financial condition could be harmed if any of these risks materializes and, as a result, the trading price of our shares and our ADSs could decline.
Summary of Risks Relating to our Business
· | We may be unable to successfully implement our business strategy. |
· | Future partnerships or joint ventures that we enter into may not bring the expected financial results and could cause harm to our image as well as financial costs. |
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· | Any acquisitions or investments in other companies, products, or technologies could require significant management attention, disrupt our business, dilute stockholder value, and adversely affect our operating results. |
· | We face various risks related to |
· |
We face increasing competition from other providers and services, which may adversely affect our results of operations. |
· | Our operations depend on our ability to efficiently operate our systems and controls that are subject to failure that could affect our business and our reputation. |
· | We face various cyber-security risks that, if not adequately addressed, could have an adverse effect on our business. |
· | Our operations could be suspended or interrupted as a result of natural or man-made disasters or other unexpected |
· | We may be unable to implement our plans to expand and enhance our existing networks in Brazil in a timely manner or without unanticipated costs, which could hinder or prevent the successful implementation of our business plan and |
· | We depend on key suppliers, certain inputs and |
Summary of Risks Relating to Brazilthe Brazilian Telecommunications Industry
· | Anatel classified us as an economic group with significant market power in some markets and we are now subject to increased regulation. |
· | The Brazilian government under certain circumstances may terminate our authorizations or we may not receive renewals of our authorizations. |
Summary of Risks Relating to Brazil
· | Risks related to Brazilian economic and political conditions may negatively affect our business. |
· | The Brazilian government has exerted significant influence over the Brazilian economy and continues to do so. This involvement may have an adverse effect on our activities, our business and on the market prices of our shares and ADSs. |
· | Changes in Brazilian tax laws may have an adverse impact on the taxes applicable to our business and over our prices. |
Summary of Risks Relating to our Common Shares and the ADSs
· | Our controlling shareholder has power over the direction of our business. |
· | Holders of our ADSs are not entitled to attend shareholders’ meetings and may only vote through the depositary. |
· | Holders of our ADSs or common shares in the United States may not be entitled to participate in future preemptive rights offerings. |
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· | Cash dividends, interest on shareholders’ equity and other cash distributions, as well as judgments seeking to enforce our obligations in respect of our shares or ADSs in Brazil will be payable only in |
· | Holders of ADSs or common shares could be subject to Brazilian income tax on capital gains from sales of ADSs or common shares. |
· | An exchange of ADSs for common shares risks loss of certain foreign currency remittance and Brazilian tax advantages. |
Risks Relating to our Business
We face various risks related to the COVID-19 pandemic and other health epidemics and outbreaks, which may have material adverse effects on our business, financial condition, results of operations and cash flows.
We face various risks related to health epidemics and other outbreaks, including the global outbreak of COVID-19. The COVID-19 pandemic, changes in consumer behavior related to illness, pandemic fears and market downturns, and restrictions intended to slow the spread of COVID-19, including quarantines, government-mandated actions, stay-at-home orders and other restrictions, led to reduction of demand for our services and our ability to provide those services, disruption and volatility in the global and Brazilian capital markets and had a negative impact on global, regional and national economies and disrupted supply chains and reduced international trade and business activity.
During 2020, the COVID-19 pandemic adversely affected our financial condition and operational results, with a decrease in net revenues in 0.6%, mostly impacted by the reduction of commercial activities due to the COVID-19 pandemic, with the temporary closure of certain of our retail locations and other points of sale, which caused a 22.7% drop in Goods Sold due to decreased demand as a result of the reduced disposable income available to certain customers and to the temporary closure of certain of our retail locations and other points of sale. The COVID-19 pandemic and government measures in response thereto continues to impact our business and operations, to a lesser extent, and depending on the duration of the epidemic, related restrictive measures as well as the effect of governmental regulations imposed in response to the pandemic, we may continue to be adversely impacted by the pandemic. If the pandemic continues for an extended period, it may also reduce demand from our post-paid clients for more expensive plans or certain services (e.g. roaming) or even lead to plan cancellations or increased delinquency. Protracted restrictive measures could also lead to disruptions in our logistic chain, in our suppliers’ production or deliveries or in our ability to deliver our products (such as new devices or SIM cards) or to service our network on a timely basis, which may have a material adverse effect on our business and results of operations. If significant portions of our workforce are unable to work effectively as a result of the COVID-19 pandemic, including because of illness, quarantines, facility closures, ineffective remote work arrangements or technology failures or limitations, our operations would be adversely impacted. Our availability indicators, repair performance and installation of new accesses/projects can be impacted by the effects of increased absenteeism in the field workforce and in our experts teams, or even by the imposition of Lockdown by COVID-19 that act as obstacle or hinders the displacement and access of field maintenance teams to equipment stations. We may have our supply chain for technological product inputs (like spare parts, transmission and commutation equipment, handsets and modems) impacted by any delay in the manufacturing process of vendors in their countries of origin, due to a new wave of COVID-19 that can imposes a new Lockdown. Our business could be adversely affected in many ways, potentially for a prolonged period of time, for example as a result of the impact of overall market declines and increased market volatility due to the COVID-19 pandemic, which could also ultimately negatively impact our ability to refinance our debt or raise capital in favorable terms.
To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this ‘‘Risk Factors’’ section, such as those relating to our ability to successfully implement our business strategy (see “—We may be unable to successfully implement our business strategy”) the credit risk of our customers (see “—We are subject to credit risk with respect to our customers”), our dependence on key suppliers and contractual relationships with other telecommunications providers (“—We depend on key suppliers, certain inputs and contractual relationships with other telecommunications providers which are critical to our ability to provide telecommunications services to our customers”) the Brazilian government’s influence over the Brazilian economy (see “—Risks Relating to Brazil—Risks related to Brazilian economic and political conditions may negatively affect our business,” “—The Brazilian government has exerted significant influence over the Brazilian economy and continues to do so. This involvement may have an adverse effect on our activities, our business and on the market prices of our shares and ADSs”) and volatility in global and domestic financial markets. See “—Risks Relating to Brazil— We may be impacted by volatility in the global financial markets” and “—Risks Relating to Brazil—Developments and the perception of risk in other countries may adversely affect the Brazilian economy and market price of Brazilian issuers’ securities.”
In an attempt to mitigate the impacts of the pandemic in the telecommunications industry, the Brazilian federal government, or the Federal Government, issued Decree No. 10,282/2020, establishing that telecom and internet
services were essential during the COVID-19 crisis period, as well as services related to information technology and data processing (data center) to support other activities, including call centers.
This measure ensured that Internet and telecommunications companies would not be subject to the same level of restrictions in face of the limitations that were imposed by local governments, allowing workers to carry on under exceptional working conditions, such as doctors and security officers.
Furthermore, Provisional Measure No. 952/2020 postponed the payment of the Fundo de Fiscalização das Telecomunicações, or FISTEL, taxes due between March 31, 2020 and August 31, 2020. This amounted to R$509 million in postponed taxes for us, with payment date not yet defined. The main objective of this measure was to ensure that users of telecommunications services were adequately served and did not experience massive interruptions, given the contraction of economic activities caused by the COVID-19 pandemic, while seeking to reduce the negative impact on telecommunications operators’ cash flow in the first half of 2020.
As economic activity contracted, an increase in defaults in the telecommunications sector would be expected, which would hurt operators’ cash flows at a time that connectivity is even more relevant for society. With social isolation measures in place to contain the virus, the broadband connection fostered remote communication, allowing for continued operation of various economic and educational activities, as well the population’s access to information.
We may be unable to successfully implement our business strategy.
Our business will be adversely affected if we are unable to successfully implement our strategic objectives. Factorsobjectives and factors beyond our control may prevent us from achieving our strategy.doing so.
Our business strategy is aimed at improving revenues and selective growth, while maintaining financial discipline. To achieve this goal, we seek to strengthen our market position by leveraging mobile telephonyaims to increase cash-flow generation to support new avenues of growth and increase shareholder returns and can be divided into two key focuses: (1) Core, being our mobile and broadband usagebusiness; and by exploiting opportunities arising from emerging technologies(2) Beyond connectivity being our business-to-business (B2B) / Internet of Things (IoT) and customer behavior changes.platform strategy.
In respectStrengthening our core business requires managing and expanding our infrastructure, including with the deployment of our strategic efforts regarding broadband, we are seeking to increase our presence in the residential broadband market by investing significant efforts and resources to expand our footprintnew technologies such as 5G and the densityintegration of the assets we acquired from Oi Mobile. Additionally, our fiber optic broadband service (“FTTx”), providing a higher-speed fixed connection closer to theCore strategy requires successfully monetizing our mobile customer residence, branded as TIM Live,base and launchingexpanding our fixed broadband service through mobile network,business.
Alongside Core, we implement a solution known as fixed wireless access (“FWA”)strategy of Beyond Connectivity, when wewhere our principal goal is to attract and expand partnerships that can offer broadband through LTE or 4G wireless communication networks as a type of fixed wireless access. The provision of fiber optic broadband service is a highly capital intensive business that brings a long-term return on investmentsexponential growth opportunities, while scaling-up our B2B and increases the risks to our operation. As a new business, fixed wireless access also brings new risks, particularly related to market response and customer behavior, that could negatively impact the use of our mobile network resources.
Additionally, in December 2020 we initiated to deploy a new technology in our mobile network, commercially called as 5G DSS (Dynamic Spectrum Sharing). 5G DSS is a new feature that allows the deployment of LTE and 5G in the same frequency band and dynamically allocates radio resources between the two technologies based on user demand. This technology brings some benefits like a smoothing handover between 4G and 5G networks, a correct Time-to-Market for the launching of the 5G, technology, and a better use of the spectrum between technologies as the penetration of 5G terminals increases, without the need for a spectrum reframing.IoT presence.
Our ability to implement our strategy is influenced by many factors partially or completely outside our control, including:
· | an increase in the number of competitors due to the entrance of new market participants and/or the improvement in financial strength of existing players in the |
· | increased competition from mobile virtual network |
· |
increased competition in our main markets that could force us to reduce the prices we charge for our services |
· | our ability to strengthen our competitive position in the Brazilian mobile telecommunications market; |
· | increased competition from global and local OTT (Over The Top), providers who offer content and services using the internet, including voice calls and messaging, without owning network infrastructure; |
· | our ability to efficiently operate and grow our broadband business alongside our original business as a mobile network operator (MNO); |
· | we may be unsuccessful migrating our FTTC (Fiber to the Curb) broadband legacy customers to FTTH (Fiber to the Home) technology in an efficient manner and within the planned time frame, including due to technical or competitive issues; |
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· | pursuant to our fixed broadband asset-light strategy, we may be unable to reach our FTTH coverage rollout plan since we are dependent on the network infrastructure capacity available to us, and if the network infrastructure is not deployed as currently expected, our rollout plan will be affected; |
· | our ability to successfully capture the economic value of investments and partnerships in IoT, particularly in B2B settings, including our ability to successfully transition from pilot programs to developing products and services that can generate profit at scale; |
· | our ability to find and partner with IoT providers, given the fragmented IoT market and the limited number of established providers, as well as the complexity of integrating multi-vendor solutions, including data privacy risks; |
· | our ability to select the right business partners for undertaking our customer platform strategy; |
· | our ability to develop and introduce new and innovative technologies that are received favorably by the market, and which enable us to provide |
· | controls and system technology failures, which could negatively affect our revenues and reputation; |
· | the introduction of transformative technologies that could be difficult for us to keep pace with and which could cause significant |
· | the increasing network capacity demand and therefore our ability to manage the continuous growth of mobile data traffic, which in turn requires further investments in infrastructure or the acquisition of additional radio frequencies in order to maintain network quality, especially in large cities, where population density is higher and the costs of network expansion are considerably high; |
· | the development and expansion of NGSO satellite internet (Non-Geostationary-Satellite Orbit), which may offer significant market and product opportunities in the telecommunications sector by offering broad wide-range coverage at high speed while also disrupting the business of existing providers; |
· | our ability to operate efficiently and to pay or refinance our debt as it comes due, particularly in |
· | our ability to most efficiently scale our structure; |
· | our ability to attract and retain qualified personnel; |
· | performance of |
· | government policy and changes in the regulatory environment or legal framework in Brazil; |
· | the effect of exchange rate and inflation fluctuations; |
· | the outcome of litigation, disputes and investigations in which we are involved or may become involved; |
· | the costs we may incur due to unexpected events, including in |
· | large scale adverse events that could cause negative effects, requiring a long |
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· | the real possibility of an increase in taxes by state governments and the Brazilian Federal Government in order to balance their financial |
As a result of these uncertainties, there can be no assurance that our strategic objectives can effectively be attained in the manner and within the time frame described.
Future acquisitions of,partnerships or investments in, other companies, products, or technologiesjoint ventures that we enter into may not bring the expected financial results and could require significant management attention, disruptcause harm to our business, dilute stockholder value, and adversely affect our operating results.image as well as financial costs
We may enter into relationships with other businesses in order to expand our platform, which could involve preferred or exclusive licenses, additional channels of distribution, or discount pricing or investments in other companies. Negotiating these transactions can be time-consuming, difficult, and expensive, and our ability to close these transactions may be subject to third-party approvals, such as government regulatory approvals, which are beyond our control. Consequently, we can make no assurance that these transactions, once undertaken and announced, will close.
Any acquisitions,Furthermore, our established partnerships are subject to common litigation risks and we can make no assurance that these established partnerships or future partnerships will not become involved in any type of dispute. We may also be required to initiate litigation to protect our interests, including, among others, to enforce our intellectual property rights arising from our investment and development of new technologies as part of such partnerships or joint ventures that we makeventures.
Any acquisitions or enter intoinvestments in other companies, products, or technologies could require significant management attention, disrupt our business, dilute stockholder value, and harmadversely affect our financial condition.operating results.
Our business strategy has included, and may in the future include, acquiring other complementary products, technologies, or businesses. We evaluate and expect in the future to evaluate potential strategic acquisitions of, and partnerships or joint ventures with, complementary businesses, services or technologies. For example, in 2021, we entered into the Oi Agreement, as defined herein, with respect to the Acquisition of Oi Group’s UPI Mobile Business, which we expect will add value for us and our shareholders. However, we may not ensurecannot assure you that any benefits will materialize, and we may suffer losses in connection to the used funds and to the opportunity costs related to such transactions.
Acquisitions or investments may result in unforeseen operating difficulties and expenditures and we may not achieve the anticipated benefits from certain acquisition, partnership and joint venture due to a number of factors, including:
· | inability to integrate or benefit from businesses, services, customers or technologies that we acquire or with which we form a partnership or joint venture in a profitable manner; |
· | unanticipated costs or liabilities associated with the acquisition; |
· | inability to finance any businesses, services or technologies that we acquire or with which we form a partnership or joint venture; |
· | difficulty integrating the accounting systems, operations, and personnel of the acquired business; |
· | difficulties and additional expenses associated with supporting legacy products and hosting infrastructure of the acquired business; |
· | diversion of management’s time and resources from other core business concerns; |
· | adverse effects to our existing business relationships with business partners and customers as a result of the acquisition; |
· | the potential loss of key employees; and |
· | use of resources that are needed in other parts of our business. |
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In addition, we may not be successful in identifying acquisition, partnership and joint venture targets or our competitors may be willing or able to pay more than us for acquisitions, which may cause us to lose certain acquisitions that we would otherwise desire to complete.
Also, to the extent we pay the purchase price of any acquisition in cash, it would reduce our cash reserves, and to the extent the purchase price is paid with our common shares, it could be dilutive to our shareholders. To the extent we pay the purchase price with proceeds from the incurrence of debt, it would increase our level of indebtedness and could negatively affect our liquidity and restrict our operations.
Furthermore, even if any such transaction is consummated, we may be unable to successfully integrate the new operation, business or partnership contemplated thereunder or to realize expected benefits and synergies in a timely and effective manner due to difficulties in negotiating or aligning interests with potential partners or counterparties.
We face various risks related to health epidemics, pandemics and outbreaks, such as COVID-19, which may have material adverse effects on our business, financial condition, results of operations and cash flows.
We face various risks related to health crisis such as epidemics, pandemics or outbreaks (including COVID-19). These events can trigger changes in consumer behavior related to illness, death, fear and market downturns.
Additionally, restrictions intended to slow the spread of a health epidemic, pandemic or outbreak, such as quarantines, government-mandated actions, stay-at-home orders and other restrictions, may lead to: (i) a reduction in demand for our services, (ii) hinder our ability to provide services, (iii) disrupt supply chains; (iv) reduce international trade and business activity; and (v) create volatility in the global and Brazilian capital markets and have a negative impact on the local economy.
If significant portions of the workforce are not able to work effectively because of a health crisis, such as in the case of epidemics, pandemics and other outbreaks, including due to illness, quarantine, facility closures, ineffective remote work agreements or technology failures or limits, our operations could be significantly disrupted. Network availability, performance, maintenance, condition, repair and our ability to setup or install new connections may be affected by the effects of increased absenteeism in the field workforce, or by the imposition of restrictions such as the type implemented during the COVID-19 outbreak, for example, by hindering the movement and access of our field maintenance teams to equipment stations. The supply chain for technology products, and their underlying components (such as spare parts, transmission and switching equipment, appliances and modems) can be impacted by any delay in the manufacturing processes of suppliers in their countries of origin.
As a result of health epidemics, pandemics and outbreaks, our business can be adversely affected in many ways, potentially for an extended or unpredictable period of time. For example, as a result of impacts on the global economy, market declines and increased market volatility, which could also adversely affect our ability to refinance debt or raise capital on favorable terms.
To the extent any health crisis, epidemic, pandemic or outbreak (such as COVID-19), adversely affects our business and financial results, it could also have the effect of heightening many of the other risks described in this ‘‘Risk Factors’’ section, such as those relating to our ability to successfully implement our business strategy (see “—We may be unable to successfully implement our business strategy”) the credit risk of our customers (see “—We are subject to credit risk with respect to our customers”), our dependence on key suppliers and contractual relationships with other telecommunications providers (“—We depend on key suppliers, certain inputs and contractual relationships with other telecommunications providers which are critical to our ability to provide telecommunications services to our customers”) the Brazilian government’s influence over the Brazilian economy (see “—Risks Relating to Brazil—Risks related to Brazilian economic and political conditions may negatively affect our business”) and volatility in global and domestic financial markets. See “—Risks Relating to Brazil— We may be impacted by volatility in the global financial markets” and “—Risks Relating to Brazil—Developments and the perception of risk in other countries may adversely affect the Brazilian economy and market price of Brazilian issuers’ securities.”
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Goodwill impairments may be required in relation to acquired businesses.
We have made business acquisitions in the past and may make further acquisitions in the future. It is possible that the goodwill which has been attributed, or may be attributed, to these businesses may have to be written down if our valuation assumptions are required to be reassessed as a result of any deterioration in the underlying profitability, asset quality and other relevant matters of the businesses. According to the relevant IFRS accounting standard, impairment testing in respect of goodwill is performed annually, or more frequently if there are impairment indicators present, and comprises a comparison of the carrying amount of the cash-generating unit with its recoverable amount. There can be no assurances that we will not have to write down the value attributed to goodwill in the future, which would adversely affect our results and net assets.
We face increasing competition from other providers and services, which may adversely affect our results of operations.
We face competition throughout Brazil from many providers in the personal communications service or PCS,(“PCS”), market. We compete with providers of mobile telecommunication, VoIP services (“Voice over Internet Protocol”), and landline telecommunications services – including by bundling voice and data to customers in a single offer. Due to this increasing competition, we may incur higher advertising and commercial costs as we attempt to maintain or expand our market share. Other than TIM, the following main competitors also hold authorizations to provide PCS with national coverage: Claro S.A., under the brand name Claro and Telefônica Brasil S.A., or Telefônica Brasil, under the brand name Vivo Oi S.A., under the brand name Oi and, Nextel Telecomunicações Ltda., under the brand name Nextel, which was acquired by Claro.(“Vivo”). Moreover, all PCS providers with national coverage offer third generation, or 3G, and fourth generation, or 4G, fifth generation, or 5G mobile telecommunications network technology, reducing differentiation. Possible marketWith the recent acquisition of Oi Mobile assets by TIM, Vivo and Claro, we believe that the likelihood of further consolidations in the near future,Brazilian telecom market among the main competitors are remote, but if further consolidations driven by our main competitors were to occur, those consolidations may favor their strategic advantage with increased market power and access to greater financial resources, thereby weakening our market position.
We also expect to face increased competition from other services outside the telecommunications industry. Technological changes, such as the development, roll-out, and improvement of 4G and 5G mobile networks, may create new revenue streams but also hinder traditional services, introducing additional sources of competition, such as OTT competitors providing communicationis already the case with services like VoIPVoLTE calls, messages and messages.SMS. These OTT communication apps are often free of charge (i.e., no subscription fee), accessible by smartphones, and usually allow their users to have access to potentially unlimited messaging and voice services over the Internet, bypassing traditional and more profitable voice and messaging services, such as SMS, which no longer represent significant revenues. As penetration of smartphones in Brazil increases and OTT application services become widespread, SMS is becoming irrelevant.services. As a result, voice traffic is migrating to data and offers from almost all competitors have started to include unlimited voice, thereby accelerating commoditization. Furthermore, very often OTT applications become so important to customers that they are bundled as zero-rated services, or OTT applications for which data usage is free. These and other factors, including the regulatory and tax asymmetry, are responsible for the increase in the competitive pressure we are facing in the mobile market.
OTT application service providers also leverage existing infrastructures and generally do not operate capital-intensive business models associated with traditional mobile network operators like TIM. Technological developments have led to significant improvements in the services provided by OTT applications – particularly in speech quality delivered by data communications apps, strengthening their positioning and relevance as competitors. In addition, providers with strong brand capability and financial strengths have turned their attention to the provision of OTT application services. In the long term, if non-traditional mobile voice and data services or similar services continue to increase in popularity, as they are expected to do, and if we and other mobile network operators are not able to address this competition, this could contribute to further declines in mobile monthly average revenue per user or ARPU,(“ARPU”), and lower margins across many of our products and services, thereby having a material adverse effect on our business, results of operations, financial condition and prospects.
OTT service providers concentratehold most of the content, the means to create it and the distribution channel. WithTogether with these resources they are dedicateddedicate themselves to creating new ways the user canfor their customers to interact with and consume content. As a result, it can be challenging for network operators, like TIM are challenged to rethink Value-Added Services and may stumble upon limitations beyond technology, such as regulation, thereby not having enough leverageourselves, to compete.design value-added services that are beneficial to our customers. In addition to technological, we may face other hurdles to offering value-added services, such as regulation.
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Additionally, we expect that the 3.5GHz rights that were acquired by regional providers may provide them with an opportunity to become mobile network operators (“MNOs”). In addition, the new neutral network, which is proposed to be offered by Winity Telecom (the winner of the 700 MHz spectrum), may leverage mobile network capacity for internet service providers (“ISPs”), thereby allowing the ISPs to extend their offerings to their current broadband customer base with bundle offerings, which may increase their competitive offering in the marketplace.
In addition, Anatel promulgated a new “Spectrum Use Regulation” (RUE) based on a “use it or share it” principle to ensure the availability of radio frequencies. With the aim of increasing competition, Anatel is preparing changes to the rules to encourage the more efficient use of spectrum bandwidths, including frequencies that were acquired by operators but that are not actively being used. The RUE is designed to assist in establishing a secondary market for radio frequencies, in addition to requiring the wholesale offer of unused bands.
We expect that new products and technologies will be created with frequencydeveloped frequently and that those already established will be in continuous evolution, implying a variety of potential consequences for us. These new outcomes may, in the best scenario, reduce the price of our services by providing lower-cost alternatives or, in the worst scenario, render our products and services obsolete, requiring significant investments in new technologies. If such changes occur, our main competitors in the future may be new participants in the market without the burden of an installed older infrastructure. The amount of investment needed to upgrade our premises and to stay effectively competitive could be significant.
Rising competition may increase our churn rate and could continue to adversely affect our market share and margins. Our ability to compete successfully will depend on the effectiveness of our marketing efforts and our ability to anticipate and adapt in a timely manner to developments in the industry, including the technological changes and new services that may be introduced, changes in consumer preferences, demographic trends, economic conditions and discount pricing strategies by competitors. It is difficult to predict which of many possible factors will be important in maintaining our competitive position or what expenditures will be required to develop and provide new technologies, products or services to our customers. If we are unable to compete successfully, our business, financial condition and results of operations will be materially adversely affected.
We may be unable to respond to the trend towards consolidation in the Brazilian telecommunications market.
The Brazilian telecommunications market has been subject to consolidation.several movements towards market consolidation since its privatization in 1998. For example, in September 2014, Telefónica S.A., or Telefónica, entered into a stock purchase agreement to acquire from Vivendi S.A., or Vivendi, all of the shares of GVT Participações S.A., the controlling shareholder of Global Village Telecom S.A., or GVT, and such acquisition, the GVT acquisition. The GVT acquisition increased Telefónica’s share of the Brazilian telecommunications market, anddetailed information on transactions we believe such trend could continue in the industry as providers continue to pursue economies of scale. In March 2019, Nextel Brazil was acquired by Claro S.A. and the Economic Defense Administrative Council (Conselho Administrativo de Defesa Econômica), or CADE, definitively approved the purchase of Nextel by Claro (America Movil group) in December 2019. In December 2020, we presented a jointly offer with Telefônica Brasil S.A. (VIVO) and Claro S.A. (CLARO) for the acquisition of Oi Group’s UPI mobile business, as part of Oi Group’s judicial reorganization (a form of bankruptcy protection under Brazilian law) started in June 2016. The closing of such transaction is subject to the approval of Anatel and the CADE and is expected to occur by the end of 2021. Seehave undertaken see “Item 4. Information on the Company—A. History and Development of the Company—Recent Developments—Acquisition of Oi Group’s UPI Mobile Business.”Historical Background.
TheMore recently, the economic and regulatory environment faced by some relevant telecommunications companies in Brazil suchcould be understood as Oi, Sercomtel,having played an important role in encouraging a local phone and Internet service provider in the state of Paraná, and Sky, could also be expected to encourage the consolidation trend or even the entry of a new competitor in the Brazilian telecommunications market. towards market consolidation.
In 2018, via a new resolution, Anatel reduced one of the main regulatory barriers to consolidation in the mobile market.
Resolution No. 703/2018 changed the spectrum cap regulation which increasedby increasing the amount of spectrum bandwidth an operator is allowed to retain, depending on frequency range and applicable antitrust measures. If suchOn November 5, 2020, Anatel Resolution No. 736/2020 amended Resolution No. 703/2018 by establishing new maximum limits for the spectrum for SMP licenses. These changes together with financial distress of two major participants in the mobile market, Nextel and Oi Group, led to a new wave of mergers and acquisitions activity.
In the fixed broadband market, consolidation occurs, itmovements have been frequent among regional internet service providers, as well as spinoff transactions which separate formerly integrated operations between client focused companies and network infrastructure focused companies. Movements like those may result in increased competition within our market. We may be unable to adequately respond to pricing pressures resulting from consolidation in our market, adversely affecting our business, financial condition, and results of operations.
We may also consider engaging in merger ormergers and acquisitions activity, as we did by participating in the acquisition activityof Oi Mobile, in response to changes in the competitive environment, which could divert resources away from other aspects of our business.
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In this regard, potential acquisitions have inherent risks such as increasing leverage and debt service requirements, combining company cultures and facilities, potential exposure to successor liability, and the need to raise additional capital, which may not be possible at that time. Any of these and other factors could adversely affect our ability to achieve the anticipated cash flows at acquired operations or realize other anticipated benefits of acquisitions, which could negatively affect our reputation or operations.
We may face difficulties responding to new telecommunications technologies.
The Brazilian wireless telecommunications market is experiencing significant technological changes, as evidenced by the following, among other factors:
· | ongoing improvements in the capacity and quality of digital technology available in Brazil; |
· | shorter time periods between the introduction of new telecommunication technologies and subsequent upgrades or replacements; |
· | the development of user interface, or UI, and user experience, or UX, technology; |
· | the development of customer behaviors, particularly the migration of services from voice to data, requiring new planning models and accelerating the evolution of communications to increasingly occur on IP networks; |
· | the development of cloud solutions to provide platform as a service (PaaS), software as a service (SaaS), or infrastructure as a service (IaaS), in order to drive down costs; |
· | voice over LTE, known as VoLTE, which increases significantly the quality of voice calls and allows companies to traffic voice as data through their 4G networks; |
· | the expansion of |
· |
· | the deployment of a new technology in our mobile network called 5G standalone (known as 5G SA), which requires unprecedented levels of automation across an end-to-end network to fulfill the needs of new services and applications. The 5G SA network needs to be flexible, programmable and distributable in nature, so that it can provide the necessary flexibility to reduce time-to-market and provide the greatest performance and efficiency gains. As a result of the development of |
· |
the widespread implementation, in the near future, of Embedded Subscriber Identity Module, or eSIM, technology, which is a small microchip built into phones as an alternative to the conventional physical SIM card, and which will enable our customers to switch faster to other providers, thereby increasing competition; |
· | an increase in market competition in respect of residential fixed ultra-broadband, requiring operators (including former fixed internet providers which had provided services using copper and coaxial technologies) to accelerate investments in fiber capillarity deployments. This factor becomes more significant when considering the country's continental dimensions, new market opportunities and the need to provide comparable service in capacity and quality to locations far from large centers, thus boosting investments in IP backbone and datacenters; |
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card setup, and which will enable our customers to switch faster to other providers, thereby increasing competition.
· | the expansion of the Internet of Things, or IoT, technology in all of its forms and applications, requiring the creation of new platforms enabling its operation in new areas of the value chain. We are strengthening the IoT ecosystem with new partnerships, using connectivity as an enabler to increase productivity and expand the monetization of our customer base; and |
· | the acceleration in the use of artificial intelligence, or AI, and machine learning, in order to use resources more efficiently, reduce spending and increase agility. |
We may be unable to keep pace with these technological changes, which could affect our ability to compete effectively, and the investment required to adopt these new technologies will be significant, both of which could have a material adverse effect on our business, financial condition and results of operations.
Our operations depend on our ability to efficiently operate our systems and controls that are subject to failure that could affect our business and our reputation.
Our success largely depends on the continued and uninterrupted performance of our controls, network technology systems and of certain hardware. Our technical infrastructure (including our network infrastructure and information technology, or IT, systems for mobile telecommunications services) is vulnerable to damage or interruption from information and telecommunication technology failures, power loss, floods, windstorms, fires, terrorism, intentional wrongdoing, human error and similar events. An unexpected increase in volume on our network and systems could cause them to malfunction, such as in periods of increased demand or unexpected circumstances that may reduce our ability to service our infrastructure, such as in a health crisis similar to the current COVID-19 pandemic. Our controls are dependent, not exclusively, on these technological systems and are also subject to the interruptions and failures. Unanticipated problems with our controls, or at our facilities, system failures, hardware or software failures, computer viruses or hacker attacks could affect the quality of our services and cause service interruptions. Any of these occurrences could result in reduced user traffic and reduced revenue and could harm our levels of customer satisfaction, our reputation and compliance with certain of our regulatory obligations.
Our availability indicators, repair performance and installation of new accesses/projects can be impacted by the effects of increased absenteeism in the field workforce and our experts teams in technology, or even by the imposition of Lockdown by COVID-19lockdowns as a result of any health crisis that prevents or hinders the displacement and access of field maintenance teams to equipment stations.
We may have ourOur supply chain for technological product inputs (like spare parts, transmission and commutation equipment, handsets and modems) may be impacted by any delay in the manufacturing process of vendors in their countries of origin, due toincluding as a new waveresult of COVID-19a health crisis or military conflicts that imposes a total Lockdown.could impact logistics and global supply chain.
Our operations and reputation could be materially negatively affected by cyber-security threats or our failure to comply with new data protection laws, mainly the Brazilian General Data Protection Law (Law No. 13,709/2018), or the LGPD, which came into effect on September 18, 2020, following the President of Brazil’s veto of article 4 of Provisional Measure No. 959/2020, which established that the LGPD would only come into effect on May 3, 2021. However, the administrative sanctions provisions of LGPD will only becomebecame enforceable as of August 1, 2021, pursuant to Law No. 14,010/2020. Once the administrative sanctions of the LGPD become enforceable, cybersecurity incidents and data breach or leakage events may subject us to the following penalties: (1) warnings, with the imposition of a deadline for the adoption of corrective measures; (2) a one-time fine of up to 2% of gross sales of the company or a group of companies limited to a maximum amount of R$50,000,000 per violation; (3) a daily fine, up to a maximum amount of R$50,000,000 per violation; (4) public disclosure of the violation; (5) the restriction of access to the personal data to which the violation relates, until corrective measures are implemented; (6) deletion of the personal data to which the violation relates; (7) partial suspension of the databases to which the violation relates for up to 12 months, until corrective measures are implemented; (8) suspension of the personal data processing activities to which the violation relates for up to 12 months; and (9) partial or full prohibition on personal data processing activities. The postponement of the administrative sanctions does not prevent the competent authorities from overseeing activities or enacting additional rules to be complied with prior to such effectiveness date, nor does it prevent individual or collective lawsuits based on violation of data subject’s rights and subject to civil liability. Any proceeding or action and related damages could be harmful to our reputation, force us to incur significant expenses, divert the attention of our management, increase our costs of doing business or result in the imposition of financial penalties.
In addition, Decree No. 10,474/2020 created the regulatory agency of the National Data Protection Authority, or ANPD. The ANPD must ensure the protection of personal data and will deal with cases regarding commercial and industrial secrets in Brazil.
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ANPD is also responsible for developing guidelines for the Protection of Personal Data and Privacy National Policy and for inspecting and applying sanctions in the event of data breaches. ANPD also fosters studies on national and international practices for the protection of personal data and privacy and also encourages the adoption of standards applicable to a variety of services and products seeking to ensure owners have control over their personal data,breaches according to the activitiesresolution CD/ANPD No. 1, of those involved.October 28, 2021. Moreover, ANPD can issue regulations and procedures to protect personal data and privacy, as well as responsible for assessing the impact of personal data protection in scenarios that may be deemed as a high risk to personal data protection principles. As a result of ANPD’s new regulations and procedures, we may be required to change our business practices and implement additional measures to adapt our personal data processing activities. This could adversely affect our business, financial condition, or results of operations. We cannot assure you that our LGPD compliance efforts will be deemed appropriate or sufficient by regulatory authorities or by courts.
The company is performingWe performed a deep-gap analysis in order to identify the main problems and, based on this analysis, intendsare now in the final phase of implementing resolutions to implement a master planall the issues identified in order to achieve full compliance with the new LGPD requirements. However, deficiencies in the full adoption of data security measures, implementing personal data processing and retention requirements and reporting data measures within a narrow mandatory time frame could lead to disputes with data protection authorities, fines or harm to our reputation.
Sophisticated information and processing systems are vital to our growth and our ability to monitor costs, render monthly invoices, process customer orders, provide customer service and achieve operating efficiencies. We cannot assure that we will be able to successfully operate and upgrade our information and processing systems or that they will continue to perform as expected without any failure. A severe failure in our accounting, information and processing systems could impair our ability to collect payments from customers and respond satisfactorily to customer needs, which could adversely affect our business, financial condition and results of operations.
Our business is dependent on our ability to expand our services while maintaining the quality of the services provided and a positive customer experience.
Our business as a telecommunications services provider depends on our ability to maintain and expand our telecommunications services network. We believe that our expected growth will require, among other aspects:
· | continuous development of our controls and operational and administrative systems; |
· | efficiently allocate our capital; |
· | increasing marketing activities; |
· | improving our understanding of customer wants and needs; |
· | continuous attention to service quality; |
· | a positive customer experience; |
· | attracting, training and retaining qualified management, technical, customer relations, and sales personnel; and |
· | increased network capacity through the new spectrum |
We believe that these requirements will place significant demand on our managerial, operational and financial resources. Failure to manage successfully our expected growth could reduce the quality of our services and result in
an inadequate customer experience, with adverse effects on our business, financial condition and results of operations.
Our operations are also dependent upon our ability to maintain and protect our network. Damage to our network and backup systems could result in service delays or interruptions and limit our ability to provide customers with reliable service over our network. The occurrence of an event that damages our network may adversely affect our business, financial condition and results of operations.
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We face various cyber-security risks that, if not adequately addressed, could have an adverse effect on our business.
We face various cyber-security risks that could result in business losses, including, but not limited to, contamination (whether intentional or accidental) of our networks and systems by third parties with whom we exchange data, equipment failures, unauthorized access to and loss of confidential customer, employee and/or proprietary data by persons inside or outside our organization. We are also exposed to cyber-attacks causing systems degradation or service unavailability, the penetration of our information technology systems and platforms by malicious third parties, and infiltration of malware (such as computer viruses) into our systems.
Cyber-attacks against companies have increased in frequency, scope and potential harm in recent years. Further, the perpetrators of cyber-attacks are not restricted to particular groups or persons. These attacks may be committed by companyour employees or third parties operating in any region, including jurisdictions where law enforcement measures to address such attacks are unavailable or ineffective. We may not be able to successfully protect our operational and information technology systems and platforms against such threats. There can be no assurance that we will be successful in preventing cyber-attacks or successfully mitigating their effects. Similarly, there can be no assurance that we or our third-party providers and other contractors will be successful in protecting our customers’ personal data and other data that is stored on our and their systems. Further, as cyber-attacks continue to evolve, we may incur significant costs in the attempt to modify or enhance our protective measures or investigate or remediate any vulnerability.
The inability to operate our networks and systems as a result of cyber-attacks, even for a limited period of time, may result in significant expenses to us and/or a loss of market share to other communications providers. The costs associated with a major cyber-attack could include expensive incentives offered to existing customers and business partners to retain their business, increased expenditures on cyber-security measures and the use of alternate resources, lost revenues from business interruption and litigation. If we are unable to adequately address these cyber-security risks, orour operating network and information systems could be compromised, which would have an adverse effect on our business, financial condition, reputation and results of operations. In order to mitigate such risks, we are currently adopting ISO 27001 standard best practices and expect to be certifiedobtained the certification in the future.November 2022. As of the date of this annual report, such certification process is still ongoing. Additionally, due to the recent Russia-Ukraine conflict, there have been publicized threats to increase hacking activity against the critical infrastructure of any nation or organization that retaliates against Russia for its invasion of Ukraine. Any such increase in such attacks on our third-party service providers or other systems could adversely affect our network systems or other operations. We have measures in place that are designed to detect and respond to such cyber-attacks and data security incidents, but there can be no assurance that our efforts will prevent or detect such cyber-attacks and data security incidents.
We depend on data centers operated by third parties and third-party cloud computing platforms, and any disruption in the operation of these facilities or platforms or access to the Internet would adversely affect our business.
Our business requires the ongoing availability and uninterrupted operation of internal and external systems and services. We have adopted new technology infrastructure solutions, which carries with it some risk to business continuity. With the adoption of cloud computing technology, key IT systems are being migrated to the public cloud. Despite cloud computing reducing some risks, such as delays in the supply of equipment by suppliers (like spare parts, servers, etc.), the adoption of cloud computing means that the control and responsibilities for the proper functioning of the systems are shared between ourselves and the third parties. In all cases, the third parties will be responsible for the physical infrastructure, connectivity, energy supply, cooling and all the capabilities related to infrastructure availability. Depending of the cloud service type involved for any specific system (e.g. for IaaS, PaaS, SaaS), other capabilities will be the responsibility of the third party, according to the principles of the Shared Responsibility Model defined by the Cloud Security Alliance, and incorporated into our contracts with the third-party providers
These third-party providers may experience connectivity disruption, outages and other performance problems, which may be caused by a variety of factors, including infrastructure changes, human or software errors, viruses, security attacks, fraud, spikes in customer usage and denial of service issues. As such, our success also depends directly on the continuity of the provision of computing capacity and the availability of connectivity between the cloud computing provider’s datacenters, including the connectivity with our datacenters and internal networks. An intermittent failure or complete lack of connectivity or system availability, may cause interruption to our services, affecting our availability indicators as well as our revenue and reputation.
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Having data hosted on a public cloud also poses a risk to our ability to comply with data protection principles or law (such as the LGPD). As such, our success depends on our ability to certify that cloud providers are adopting security best practices, as well as complying with the terms of data protection laws in accordance with our contractually agreed terms.
Certain debt agreements of our subsidiary contain financial covenants and any default under such debt agreements may have a material adverse effect on our financial condition and cash flows.
Certain of our existing debt agreements contain restrictions and covenants and require the maintenance or satisfaction of specified financial ratios and tests. See “Item 5. Operating and Financial Review and Prospects.” The ability of our subsidiary to meet these financial ratios and tests can be affected by events beyond our and their control, and we cannot assure that itwe will meet those tests. Failure to meet or satisfy any of these covenants, financial ratios or financial tests could result in an event of default under these agreements. As
Our ability to meet these financial ratios and tests can be affected by events beyond our control, and we cannot assure you that we will meet those requirements. Failure to meet or satisfy any of December 31, 2020, we had approximately R$2,345 million in consolidated outstanding indebtedness, of which 100% was denominated in foreign currency (primarily U.S. dollars), for which we use derivative instruments to offset exposure to foreign currency. these requirements may have a material adverse effect on our financial condition and cash flows.
If we are unable to meet these debt service obligations, or comply with these debt covenants, we could be forced to restructure or refinance this indebtedness, seek additional equity capital or sell assets.
Due to the nature of our business we are exposed to numerous lawsuits, consumer claims and tax-related proceedings.
Our business exposes us to a variety of lawsuits and other proceedings brought by or on behalf of consumers in the ordinary course of our operationsbusiness as a mobile telecommunications provider in Brazil. We are subject to a number of public civil actions and class actions that have been brought against mobile telecommunications providers in Brazil relating principallymainly related to network quality, the expiration of prepaid usage credits, minimum term clauses, subscription fees, quality of service and the use of land to install our network sites. These suits include claims contesting certain aspects of the fee structure of our prepaid plans, hybrid (monthly billed fixed price), or so-called Controlcontrol plans and postpaid plans, which are commonplace in the Brazilian telecommunications industry.
In addition, federal, state and municipal tax authorities have questioned some tax procedures we have adopted, and have raised questions regarding the calculation of the basis for certain sector-specific contributions (FUST and FUNTTEL, as each are defined in “Item 4. Information on the Company—B. Business Overview—Taxes on Telecommunications Goods and Services”). As of December 31, 2020,2022, we are subject to approximately 3,2103,487 tax-related lawsuits and administrative proceedings with an aggregate value of approximately R$16,98618,645 million classified as “probable loss” and “possible loss” by our legal advisors. In addition, there are tax proceedings arising from the acquisition of the former Intelig business (currently TIM S.A.) by the former parent company of the TIM Participações group, relating to the purchase price.
An adverse outcome in, or any settlement of, these or other lawsuits could result in losses and costs to us, with an adverse effect on our business practices and results of operations. For some of these lawsuits, we were not required to and have not established any provision on our statement of financial position or have established provisions only for part of the amounts in controversy, based on our judgments or opinions of our legal counsel as to the likelihood of winning these lawsuits. In addition, our senior management may be required to devote substantial time to these lawsuits, which they could otherwise devote to our business. See Note 2325 to our consolidated financial statements.
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Any modification or termination of our ability to use the “TIM” trade name may adversely affect our business and operating results.
Telecom Italia S.p.A., or Telecom Italia, as Licensor, and TIM S.A., TIM Participações, which merged into TIM S.A,S.A., and Instituto TIM as Licensees, entered into a trademark license agreement, or the Trademark License Agreement, where Telecom Italia granted the Licensees a non-exclusive and non-transferable license of 196 trademarks (including the TIM trademark) to: (i) promote and render Licensees’ services, including co-branded services; (ii) use the trademarks as domain names of websites owned by the Licensees, dedicated to the promotion and/or the rendering of the Licensees’ services; (iii) use the TIM trademark in events, campaigns, commercial partnerships, sponsorship projects and other activities in order to promote Licensees’ services; and (iv) use “TIM” as part of Licensees’ corporate names. The Trademark License Agreement is limited to Brazil and valid until December 31, 2023, unless terminated earlier. Telecom Italia, who owns the rights to the “TIM” trade name, may prevent us from using the TIM trademark by termination of the Trademark License Agreement. The loss of use of the trademark “TIM” may have a material adverse effect on our business and operating results.
We are subject to credit risk with respect to our customers.
Our operations depend to a significant extent on the ability of our customers to pay for our services. Under Anatel regulations, we are allowed to undertake certain measures to reduce customer defaults, such as restricting or limiting the services we provide to customers with a history of defaults. If we are unable to undertake measures to limit payment defaults by our subscribers or that allow us to accept new subscribers based on credit history, we will remain subject to outstanding uncollectible amounts, which could have an adverse effect on our results of operations. See “Item 5. Operating and Financial Review and Prospects.”
We may be subject to liability related to outsourcing certain functions to third-party service providers.
We may be exposed to contingent liabilities due to our outsourcing of certain functions to third-party service providers. Such potential liabilities may involve claims by third-party providers who claim that they are treated as direct employees as well as claims for secondary liability resulting from work placeworkplace injury, wage parity and
overtime pay complaints. Our financial condition and results of operation may be adversely affected in the event that a material portion of these liabilities are decided against us.
The Brazilian Supreme Court has recently declared the outsourcing of any company’s main activities as legal, which indicates a probable favorable outcome regarding the matter. However, it is worth to mention that,In any case, regardless of the decision in Supreme Court, we would also be subsidiarily and jointly liable with the service provider in connection with any violation of labor obligations related to the outsourced workers.
If the contracting of third partythird-party services are considered to involve the main activities of the company, it may be characterized as a direct employment, which would significantly increase our costs and as a result we may be subject to administrative proceedings by the relevant labor authorities and may be required to pay fines to the third partythird-party service providers.
We depend on key suppliers, certain inputs and contractual relationships with other telecommunications providers which are critical to our ability to provide telecommunications services to our customers.customers or may have a material adverse effect on our operations.
We rely on various vendors to supply network equipment, mobile handsets and accessories necessary for our business. These suppliers may, among other things, delay delivery periods, increase their prices, limit the amounts they are willing or able to supply to us, or suffer disruptions in their own supply chains. If these suppliers are unable or unwilling to provide us with equipment or supplies on a regular basis, we could face difficulties in carrying out our operations, which could negatively affect our results of operations and limit our ability to execute our agreements. Further, in 2020 we have had to face the negative effects due to the COVID-19 that increased prices and delayed delivery.
Geopolitical, sanitary, financial and sanctions aspects, among others, could cause an interruption of materials and services supply. Supplier exclusivity or dependence increases exposure to risk. Interruption can impact not only the acquisition of new materials and services, but also the maintenance of existing equipment and operations.
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We rely on certain telecommunications providers and partners, through contractual arrangements, to supply key infrastructure and other services. Termination, non-renewal and/or non-renewal of current agreements by suppliers or partners, such as SWAP (partnerships with Operators); Indefeasible Rights of Use (IRU); lease of circuits (e.g. EILD, IP Peering, IP Transit and Satellite bandwidth/capacity); co-sites deals with others telecommunications companies and private partners (e.g. Tower Co.); and rights of use with private companies and public authorities, as well as the interruption in the negotiation of biosites and/or sites destined to infrastructure services and rental areathose agreements, may have a material adverse effect on our business.
Anatel permits such agreements between telecommunications providers in order to avoid unnecessary duplication of networks and infrastructure, and to lower costs and increase the reach of telecommunication services in Brazil.
Some (non-exhaustive) examples of these agreements include:
· | SWAP agreements (exchange of network capacity or assets between operators); |
· | Indefeasible Rights of Use (IRU); |
· | Lease of circuits (e.g. EILD, IP Peering, IP Transit and Satellite bandwidth/capacity); |
· | Co-sites deals with other operators and tower companies; |
· | Rights of use with private companies and public authorities; and |
· | Interconnection and co-billing. |
For detailed information on these contracts see “Item 4. Information on the Company—B. Business Overview—Site-Sharing and Other Agreements”.
Furthermore, the constant changes in the telecommunications industry, such as the growth of broadband, may result in a limited supply of equipment essential for the provision of services. The restrictions on the number of manufacturers imposed by the Brazilian government for certain inputs pose certain risks, including susceptibility to currency fluctuations and the imposition of customs or other duties for those inputs which are imported. Inputs produced domestically are available from a limited number of domestic suppliers, and accordingly we are highly dependent upon their ability to accurately forecast the domestic demand and manage inventory.
The need to hire many key suppliers requires complex deals, detailed and timely analysis of contractual documents and an integrated, end-to-end management process.
The potential positive impact of 5G networks on multiple industries, specifically the optimization of energy usage; cloud computing; ultrafast broadband; internet of things (IoT); innovation, including self-driving cars, transportation; agribusiness; education; health; and factory equipment. The necessary features for a company to benefit from the 5G network supply chain are software-based, and our supply chain is increasingly based on cloud computing and software.
We also rely on certain other telecommunications providers, through contractual agreements with us, to supply key infrastructure and other services, such as Industrial Exploration of Dedicated Lines (Exploração Industrial de Linhas Dedicadas), or EILD, interconnection and co-billing (see “Item 4. Information on the Company—B. Business Overview—Site-Sharing and Other Agreements”). Anatel permits such agreements between telecommunications providers in order to avoid unnecessary duplication of networks and infrastructure, and to lower costs and increase penetration of wireless services in Brazil.
Discussions regarding data safety of equipment provided by Chinese suppliers could have side effects across the global ICT sector, also significantly affecting our supply chain, infrastructure deployment and costs, and impacting the future of the industry as a whole.
In June 2016, one telecommunications provider that we maintain a contractual relationship with, Oi, filed for judicial reorganization (a form of bankruptcy protection under Brazilian law), acknowledging its inability to sustain its financial obligations. The judicial reorganization plan was approved at Oi’s general shareholders meeting in December 2017, after intense negotiations among credit holders and shareholders, and was judicially ratified in January 2018 subject to certain reservation regarding the terms of the judicial reorganization, mainly regarding Oi’s relationship with its creditors. In March 2018, through a joint withdrawal of proceedings, TIM and Oi settled their claims, which were generally related to infrastructure and interconnection, via a dedicated conflict resolution process at Anatel. For additional information regarding recent transactions with Oi, see “Item 4. Information on the Company—A. History and Development of the Company—Recent Developments—Acquisition of Oi Group’s UPI Mobile Business.”
Our operations could be suspended or interrupted as a result of natural or man-made disasters or other unexpected events.events, such as those related to climate change.
Our operations may be suspended or interrupted for an indeterminate period in case of adverse events, such as a result of energy shortages, damages to our transmission bases, natural disasters, climate change or other environmental events or natural or man-made disasters, including fire, explosion, storms, geopolitical disruptions,conflict, civil unrest or health crises (such as the COVID-19 pandemic) or any other unexpected damage events. Such impacts may present disproportional geographic impacts, which may vary from impacts to a single address to an entire city or region. If we are unable to mitigate or prevent such damages in the event of a natural or man-made disaster and any other unexpected events, the suspension or interruption of our operations could have a material adverse effect on the continuity of our operations, our financial results and the compliance with regulations.
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In order to avoid or reduce indeterminate periods of suspension or interruption of operations caused by damages to our transmission bases, natural disasters or any other unexpected events, we have implemented an internal policy aimed at a continuous mapping systemic vulnerabilities in order to improve the selective process of key projects, intended to expand the robustness of the technical network infrastructure and make it gradually more resilient.
We use demand forecasts to make investments, however such forecasts may ultimately be inaccurate due to economic volatility and result in lower revenues than expected.
We make certain investments, such as the procurement of materials and the development of our network infrastructure, based on our forecasts of the amount of demand that customers will have for our services at a later date. However, any major changes in the Brazilian economic scenario may affect this demand and therefore our forecasts may turn out to be inaccurate. As a result, it is possible that we may make larger investments based on demand forecasts than were necessary given actual demand at the relevant time, which may directly affect our cash flow. Unanticipated improvements in economic conditions may have the opposite effect and equally pose a risk.
The management of our cash and our financial investments are also subject to the country’s economic conditions. We may make financial allocations in which the results of operations are not as expected, generating lower profitability or costs.
Our governance and compliance processes may fail to prevent regulatory penalties and reputational harm.
We operate in a global environment, as we have agreements with companies all over the world. Our governance and compliance processes, which include the review of internal control over financial reporting, may not prevent future breaches of all applicable legal, accounting or corporate governance standards. We may be subject to breaches of our Code of Ethics, anti-corruption policies and business conduct protocols and to instances of fraudulent behavior, corrupt practices and dishonesty by our employees, contractors or other agents. Our failure to comply with applicable laws and other standards could subject us to fines, loss of operating licenses and reputational harm.
Improper use of our networks could adversely affect our costs and results of operations.
We may incur costs associated with the unauthorized and fraudulent use of our networks, including administrative and capital costs associated with detecting, monitoring and reducing the incidence of fraud. Fraud also affects interconnection costs and payments to other carriers for non-billable fraudulent roaming. Improper use of our network could also increase our selling expenses if we need to increase our provision for doubtful accounts to reflect amounts we do not believe we can collect for improperly made calls. Any increase in the improper use of our network in the future could materially adversely affect our costs and results of operations.
We may be unable to implement our plans to expand and enhance our existing networks in Brazil in a timely manner or without unanticipated costs, which could hinder or prevent the successful implementation of our business plan and result in revenues and net income being less than expected.adversely affect our results of operations.
Our ability to achieve our strategic objectives depends in large part on the successful, timely and cost-effective implementation of our plans to expand and enhance our networks in Brazil. Factors that could affect this implementation include:
· | our ability to generate cash flow or to obtain future financing necessary to implement our projects; |
· | delays in the delivery of telecommunications equipment and broadband capacity by our vendors; |
· | the failure of the telecommunications equipment supplied by our vendors to comply with the expected capabilities; |
· | delays in obtaining licenses required to carry out construction works and other activities necessary to implement and update our network; |
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· | delays resulting from the failure of third-party suppliers or contractors to meet their obligations in a timely and cost-effective |
· |
Although we believe that our cost estimates and implementation schedule are reasonable, we cannot assure you that the actual costs or time required to complete the implementation of these projects will not substantially exceed our current estimates. Any significant cost overrun or delay could hinder or prevent the successful implementation of our business plan and result in revenues and net income being less than expected. We employ structured control tools and procedures in order to meet deadlines and avoid impacts on our business and results of operations.
Risks Relating to the Brazilian Telecommunications Industry
Anatel classified us as an economic group with significant market power in some markets and we are now subject to increased regulation.
In July 2018, Anatel published Resolution No. 694/2018, or the New PGMC,“New PGMC”, revising the general plan for competition goals (Plano Geral de Metas de Competição), or (“PGMC 2012.2012”). Under the New PGMC, TIM has been classified as having significant market power in the following relevant markets: (i) mobile network; (ii) national roaming; and (iii) high capacityhigh-capacity data transport.
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, results of operations and compliance with regulations. In the national roaming market, we must also offer roaming services at regulated rates to other mobile providers.
The values of mobile termination rate, or the “Valuenew PGMC is currently under review by Anatel and a new regulation is expected to Use the Mobile network” (VU-M), are freely negotiated between operators. Anatel, however, would serve as arbitratorcome into force in the casesecond half of disputes, and Anatel can determine2024, after a reference value accordingpublic consultation to regulatory criteria. From January 2013,be held in the reference values set by Anatel comply with a “glide path”, which led to cost-oriented values to SMP operators, starting as from 2016. On February 24, 2017, considering the glide path provided for by Act No. 6,211/2014, VU-M were again reduced, dependingsecond half of 2023. See “Item 4. Information on the Plano
Geral de Autorizações do Serviço Móvel Pessoal (PGA-SMP) Region, to approximately R$0.03 reais and, on February 24, 2018, it was reduced to R$0.01.
In December 2018, Anatel publishedCompany—B. Business Overview—Regulation of the corresponding Acts Nos. 9,918/2018 and 9,919/2018, which determined the specific reference rates, effective as of February 2020. Before coming into force, Anatel started the revision of these acts and, on February 24, 2020, it published the new Acts Nos. 986/2020 and 987/2020.Brazilian Telecommunications Industry—Significant Market Power”.
Our radio frequency or RF,(“RF”), authorizations for the 800 MHz, 900 MHz, 1,800 MHz and 1,8002,100 MHz bands that we use to provide PCS services started to expire in September 2007 and are renewable for one additional 15-year period, requiring payment at every two-year period equal to 2% of the prior year’s revenue net of taxes, by way of investment under the Basic and Alternative Service Plans, which are intended to increase telecommunications penetration throughout Brazil. Anatel has stated that the revenue on which the 2% payment is based should be calculated as including revenues derived from interconnection as well as additional facilities and conveniences. As a result, we are currently disputing these radio frequency, or RF authorization renewal payments both administratively and judicially. Although there are administrative procedures still pending on analysis, Anatel has denied the Company’sour appeals and issued Precedent No. 13, determining that revenues from interconnection as well as additional facilities and conveniences should be considered on the basis of the calculation of the price due to the renewal of the spectrum licenses. Judicially, the matter is also still under dispute. In December 2018, under Judgment No. 706 and No. 707, Anatel approved a new radiofrequency revenue segregation methodology to be applied. The application of this new methodology allows the segregation of significant market power revenues by the percentage of radiofrequency extended in relation to the total of existing radiofrequencies, both expressed in the amount of MHz.
We cannot assure that we will be able to fully comply with eachMHz, and addresses part of the dispute about the values to be paid by us due in connection with the initial renewal process.
After the expiration of the second renewal of radiofrequency use rights, there may be new administrative and judicial discussions and disputes regarding the applicable laws, regulationscalculation methodology and authorizations ordeadlines after the approval of Law No. 13,879, of October 3, 2019. The Federal Court of Accounts ruled that we willsuch renewal process may be ablesubject to complya new bidding procedure. However, Anatel has granted us and other competitors extensions for shorter terms until a decision has been made on how to proceed with future changes in the laws and regulations to which we are subject. These regulatory developments or our failure to comply with them could have a material adverse effect on our business, financial condition and results of operations.radiofrequency use rights.
As a telecommunications provider, we are subject to extensive legal and regulatory obligations in the performance of our activities which may limit our flexibility in responding to market conditions, competition and changes in our cost structure or with which we may be unable to comply.
Our business is subject to extensive government regulation, including any changes that may occur during the period of our authorization to provide telecommunication services. Anatel, which is the main telecommunications industry regulator in Brazil, regulates, among others: (i) industry policies and regulations; (ii) licensing; (iii) rates and tariffs for telecommunications services; (iv) competition; (v) telecommunications resource allocation; (vi) service standards; (vii) technical standards; (viii) quality standards; (ix) consumer rights; (x) interconnection and settlement arrangements; (xi) coverage obligations; and (xii) spectrum.
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In addition to the rules set forth by Anatel, we are subject to compliance with various legal and regulatory obligations, including, but not limited to, obligations arising from the following: (i) PCS authorizations under which we operate our cellular telecommunications business; (ii) fixed authorizations (local, national long distance, international long distance and multimedia service) under which we operate our telecommunications business; (iii) limited private services authorization under which we operate a private network formed by point-to-point radio communication (radioenlaces); (iv) the Consumer Defense Code; (v) the General Telecommunications Law (amended by Law No. 13,879/2019); and (vi) the Data Protection Law (Law No. 13,709/2018, as amended); and (vii) the Brazilian Competition Law (Law No. 12,529/2011).
In addition,Further, the Administrative Council for Economic Defense (Conselho Administrativo de Defesa Econômica) (“CADE”), the Brazilian Antitrust Enforcement Agency, is currently investigating (i) claims that the alleged formation of a consortium by the applicants (us, Claro and Vivo) for jointly acquiring Oi’s mobile assets was an infraction to Brazilian antitrust laws, by the consummation of the referred transaction before the antitrust authority reached a final decision; and (ii) the occurrence of collusive and exclusionary practices among competitors (with Vivo and Claro) regarding Oi’s mobile assets acquisition. The files for the second investigation are not yet public and we have not been officially notified. However, CADE’s final decision on Oi’s assets transaction expressly referenced the opening of such proceeding.
We are also subject to applicable national and international anti-corruption laws. We believe that we are currently in material compliance with our obligations arising out of each of the above referenced laws, regulations and authorizations.
Brazil is a highly competitive mobile market, having four companies operating networks with national coverage, plus other regional players and mobile virtual network operator or MVNOs.(“MVNOs”). Any potential deals involving such playersparticipants is likely to be carefully analyzed by CADE and Anatel, on a state-by-state basis.
On December 14, 2020, See “Item 4. Information on the Company—A. History and Development of the Company—Recent Developments—Acquisition of Oi Group’s UPI Mobile Business.”
Through the 5G spectrum auction, Anatel auctioned licenses. In addition to bidders in the auction being required to offer made by TIM, Vivo (Telefonica Brasil S.A.) and Claro (controlled by America Movil)a certain price, the competitive biddingcondition of the auction requires the successor licensee to acquire Oi’s mobile operations, which include subscribers, spectrum and mobile access sites,commit to certain minimum investments. There may be risks associated with being able to fulfill such commitments or for R$16.5 billion (US$3.2 billion). The closing of such transaction is subjectfailing to the approval of Anatel and the CADE and is expected to occur by the end of 2021.
The approval, evencomply with a weighted division of Oi’s assets between the buyers, is still being analysed by competent authorities, CADE and Anatel, as the deal generates different and complex circumstances for the telecommunications market.an investment commitment.
Over the last few years, Anatel has instituted certain administrative processesproceedings against the Companyus and other Brazilian telecommunications providers to investigate certain alleged nonconformities related to quality goals and other regulatory obligations. In response to the initiation of such Anatel proceedings, the Company,we, as well as other active telecommunications companies in the Brazilian market, opted for the negotiationto negotiate and conclusion ofenter into a Term of Conduct Adjustment or TAC.(“TAC”). The TAC aims at the remediation ofto remediate the underlying causes of the ongoing administrative processesproceedings by setting commitments forto adjust conduct adjustment and investmentan agreement with respect to general investments on additional projects in general.future projects. The TAC was approved by Anatel on August 22, 2019, and on June 19, 2020, our Board of Directors approved the execution of the TAC byTAC. On October 18, 2022, the Company.first amendment was signed following renegotiation of chapter X, section I, which included the adjustment of obligations related to certain quality indicators. See “Item 4. Information on the Company—B. Business Overview—Regulation of the Brazilian Telecommunications Industry—PCS Regulation.”
We cannot assure that we will be able to fully comply with each of the applicable laws, regulations and authorizations or that we will be able to comply with future changes in the laws and regulations to which we are subject. Moreover, compliance with this extensive regulation, the conditions imposed by our authorization to provide telecommunication services and other governmental action may limit our flexibility in responding to market conditions, competition and changes in our cost structure. These regulatory developments or our failure to comply with them could have a material adverse effect on our business, financial condition and results of operations.
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The Brazilian government under certain circumstances may terminate our authorizations or we may not receive renewals of our authorizations.
We operate our business under authorizations granted by the Brazilian government. As a result, we are obligated to maintain minimum quality and service standards, including targets for call completion rates, geographic coverage and voice accessibility, data accessibility, voice drop, data drop, data throughput, user complaint rates and completion rates to our call center. Our ability to satisfy these standards, as well as others, may be affected by factors beyond our control. We cannot assure that, going forward, we will be able to comply with all of the requirements imposed on us by Anatel or the Brazilian government. Our failure to comply with these requirements may result in the imposition of fines or other government actions, including, restrictions on our sales and, in an extreme situation, the termination of our authorizations in the event of material non-compliance.
Any partial or total revocation of our authorizations or failure to receive renewal of such authorizations when they expire would have a material adverse effect on our financial condition and results of operations.
These regulations may have an adverse effect on our financial results given the dynamics of our revenues and costs related to interconnection fees. In addition, Anatel may allow more favorable prices to operators without significant market power.
Actual or perceived health risks or other problems relating to mobile telecommunications technology could lead to litigation or decreased mobile communications usage, which could harm us and the mobile industry as a whole.
The effects of, and any damage caused by, exposure to electromagnetic fields has been and still is the subject of careful evaluation by the international scientific community, but until now there is no scientific evidence of harmful effects on health. We cannot rule out that exposure to electromagnetic fields or other emissions originating from wireless handsets will not be identified as a health risk in the future.
Our mobile communications business may be harmed as a result of these alleged health risks. These concerns could have an adverse effect on the wireless communications industry and, possibly, expose wireless providers, including us, to litigation.
In addition, although Brazilian law already imposes strict limits in relation to transmission equipment, these concerns may cause regulators to impose greater restrictions on the construction of base station towers or other infrastructure, which may hinder the completion of network build-outs and the commercial availability of new services and may require additional investments. The expansion of our network may be affected by these perceived risks if we experience problems in finding new sites, which in turn may delay the expansion and may affect the quality of our services.
Anatel Resolution No. 700/2018 sets limits of emission and exposure for fields with frequencies between 8.3 kHz and 300 GHz, and Anatel Act No. 458/2019 and Law No. 11,934/2009 establish limits related to the magnetic and electromagnetic emissions recommended by the World Health Organization and require that operators have to maintain a record of the measurements of the levels of the magnetic and electromagnetic emissions of each transmitting station.
In 2021, Law No. 14,173/2021 came into force, which amended Law No. 11,934/2009, revoking the mandatory sharing of towers with less than 500 meters between them. The withdrawal of this obligation was considered essential for the implementation of 5G in Brazil, allowing for the expected increase in density for the new technology. Further, in 2022 Law No. 14,424/2022 came into force, which allowed operators to be authorized to install antennas, even if the competent authority does not respond within a period of 60 days.
Any of these or any other additional regulations could adversely affect our business, financial condition and results of operations. Government authorities could pass more restrictivereview the regulation of wireless handsets and base stations as a result of these health concerns, or wireless companies, including us, could be held liable for costs or damages associated with these concerns, which could have an adverse effect on our business, financial condition and results of operation. We cannot assure you that further medical research and studies will refute a link between the mobile technology in question and these health concerns.
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Risks Relating to Brazil
Risks related to Brazilian economic and political conditions may negatively affect our business.
Political conditions in Brazil may affect the confidence of investors and the public in general, as well as the development of the economy. Political crises have affected and continue to affect the confidence of investors and the general public, historically resulting in economic deceleration and heightened volatility in the prices of securities offered by companies with significant operations in Brazil. The recent economic instability in Brazil has contributed to a decline in confidence in the Brazilian market, as well as to a deteriorating political environment.
PresidentialBrazil’s most recent presidential elections took place in 2018 and the first year of Jair Bolsonaro as presidentOctober 2022. Luiz Inácio Lula da Silva was marked by discussions over the reforms and political instability, whereas the second year of its presidential term was marked by attempts to deal with the current COVID-19 pandemic and consequent economic and social crisis. Despite the approvalelected President of the pension plan reform in 2020,Republic.
There are uncertainties regarding the policies to be followed by the newly inaugurated government, the ability of the president and his teamthis new government to implement policies and reforms, as well as the external perception of the Brazilian economy and political environment, all of which could have a negative impact on our business and the price of our securities. In addition, a tax reform proposed in 2021, which has not been voted on by both houses of the Brazilian Congress, has proposed the revocation of the income tax exemption on the payment of dividends, which, if enacted, would increase the tax expenses associated with any dividend or distribution by Brazilian companies and could impact our capacity to receive future cash dividends or distributions net of taxes from our subsidiaries. The Brazilian administration that took office on January 1, 2023 has stated that tax reform is among their priorities. Any such new policies and other reformsor changes to current policies may reduce investor and market confidence, and ashave a result we arematerial adverse effect on us.
In addition, if the Brazilian government is unable to predictimplement any necessary reforms, this may lead to diminished confidence in the country’sBrazilian government’s budgetary condition and fiscal stance, which could result in downgrades of Brazil’s sovereign foreign credit rating by credit rating agencies, negatively impact Brazil’s economy, and lead to depreciation of the real and/or an increase in inflation and interest rates. Any such developments may have a material adverse impact on our business, results of operations, financial condition, and prospects.
Uncertainty about the Brazilian government’s implementation of changes in policies, or regulations that affect such implementation, may contribute to economic instability in Brazil and increase the volatility of securities issued abroad by Brazilian companies, including our securities.
Any of the above factors may create additional political uncertainty, which could harm the Brazilian economy and, economic direction in coming years.consequently, our business, and could adversely affect our financial condition, our results of operations and the price of our common shares.
The Brazilian government has exerted significant influence over the Brazilian economy and continues to do so. This involvement may have an adverse effect on our activities, our business and on the market prices of our shares and ADSs.
The Brazilian government has frequently intervened in the Brazilian economy and occasionally made drastic changes in economic policy. To influence the course of Brazil’s economy, control inflation and implement other policies, the Brazilian government has taken various measures, including the use of wage and price controls, currency devaluations, capital controls and limits on imports and freezing bank accounts. We have no control over, and cannot predict what measures or policies the Brazilian government may take or adopt in the future. Our business, financial condition, revenues, results of operations, prospects and the trading price of our securities may be adversely affected by changes in government policies and regulations, as well as other factors, such as: (i) fluctuating exchange rates; (ii) inflation; (iii) interest rates; (iv) fiscal and monetary policies; (v) changes in tax regimes; (vi) liquidity in domestic capital and credit markets; (vii) economic, political and social instability; (viii) reductions in salaries or income levels; (ix) rising unemployment rates; (x) tax policies (including those currently under consideration by the Brazilian Congress); (xi) exchange controls and restrictions on remittances abroad; and (xii) other political, diplomatic, social or economic developments in or affecting Brazil.
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Uncertainty regarding changes by the Brazilian government to the policies or standards that affect these or other factors could contribute to economic uncertainty in Brazil and increase the volatility of the Brazilian capital market and of securities issued abroad by Brazilian companies.
Additionally, interruptions in the credit and other financial markets, and the deterioration of the Brazilian and/or global economic environment may, among other effects: (1) have a negative impact on demand, which may reduce sales, operating income and cash flow; (2) decrease consumption of our products; (3) restrict the availability of financing for our operations or investments, or for the refinancing of our debt in the future; (4) cause creditors to modify their credit risk policies and restrict our ability to negotiate any of the terms of our debt in the future; (5) cause the financial situation of our clients or suppliers to deteriorate; or (6) decrease the value of our investments.
Changes in Brazilian tax laws may have an adverse impact on the taxes applicable to our business and over our prices.
Our business is substantially affected by the tax regime in Brazil on telecommunications goods and services, as disclosed in detail in “Item 4. Information on the Company—B. Business Overview—Taxes on Telecommunications Goods and Services.”
In the past, therecent years, there have been several changes to Brazilian tax on financial operations, or IOF, was levied on investments madelaws and their interpretation, which has created uncertainty for our business in the Brazilian financialhow it calculates and capital markets by foreign investors. However, since October 2014, any financial operation related to these foreign investments benefits from a 0% IOF tax rate.
Due to COVID-19, the IOF rates applicable to loans and financing operations were reduced to 0% by Decree No. 10.305, published on April 1, 2020. The 0% rate comprised the operations carried out between April 3, 2020 and November 26, 2020. Later, Decree No. 10.572, published on December 11, 2020, reduced the IOF rates applicable to the same operations mentioned from December 15, 2020 to December 31, 2020.
On July 1, 2015, Decree No. 8,426 came into effect. It restored the obligation of companies to pay Programa de Integração Social, or PIS, contributions and Contribuição Social para o Financiamento da Seguridade Social, or COFINS, contributions on financial revenues at a combined and cumulative rate of 4.65% (previously set at 0% by Decree No. 5,442/2005). From that date, all financial revenues became taxable, except for financial revenues related to exchange variations of: (i) exportation of goods and services; (ii) obligations undertaken by the company, including loans and financing. Revenues related to hedging transactions on stock exchange values, also maintain the tax rate at 0% as long as it is related to operating activities and the main objective is to protect the rights and goods of the company.
In March 2017, there was a favorable decision of the Brazilian Federal Supreme Court, or STF, published in October, on the composition of the calculation bases of PIS and COFINS. In summary, the court recognized the unconstitutionality of including the major tax applicable to goods and telecommunication services (Imposto sobre Operações relativas à Circulação de Mercadorias e sobre Prestações de Serviços de Transporte Interestadual, Intermunicipal e de Comunicação), or ICMS, in the calculation of PIS and COFINS, deciding in favor of its exclusion.
Provisional Measure No. 687, published on August 18, 2015 (and converted into Law No. 13,196, which was published on December 2, 2015) authorized the monetary adjustment, based on the IPCA, of the Contribution to the Development of the National Film Industry (Contribuição para o Desenvolvimento da Indústria Cinematográfica Nacional), or CONDECINE, which is a tax levied on telecommunications servicescomplies with the objective of promoting the Brazilian audiovisual industry.
Since January 2018, therelevant tax over Value-Added Services has increased with the inclusion of Value-Added Services revenues in the calculation of Municipal Tax on Services (Imposto Sobre Serviços), or ISS, due to Law No. 157/2016, which is a municipality tax which rates vary from 2% to 5%.
There have been relevant modifications in tax legislation in 2018. Since January, 2018, the tax incidence over 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%. Also, income tax and social
contribution were regulated by Decree No. 3,000/1999 in addition to other federal laws and decrees. In December of 2018, this decree was substituted by Decree No. 9,580, which consolidates the main provisions related to income tax and social contribution.
burdens. Further changes in tax regulations, such as a possible tax reform already mentionedpreviously announced by the new Federal Government, or the previously announced increase of the PIS and COFINS tax rates that the Federal Government was studying to implement in order to restore public accounts after the decision held by the STF authorizing companies to exclude the ICMS from the PIS and COFINS basis of calculation, could impact our financial assets and liabilities as well as our pricing, which could have a material adverse effect on our business, financial condition and results of operations.
In September 2021, the Brazilian Federal Supreme Court (“STF”) ruled that the Corporate Income Tax (“IRPJ”) and the Social Contribution on Net Income (“CSLL”) are not levied on interest amounts received by taxpayers due to the application of the base SELIC interest rate applied to the refund of overpaid taxes. Currently, no temporal limitations on this granted right have been determined. However, the process has not yet been finalized in the STF.
In order to limit the ability for state governments to undertake aggressive taxation, the Brazilian Federal Constitution prescribes that the ICMS can be variable, according to the essentiality of the goods and services. As such, the most essential goods and services should generally have lower rates than luxurious goods and services.
Accordingly, in December 2021, the STF also ruled that telecommunications services must be taxed at the general ICMS rate provided for in each state’s law. In the leading case, taxpayers required recognition of the unconstitutionality of the rate of 25% levied on the supply of communication services in the State of Santa Catarina where the general rate is 17%. The STF decided that communication services should be taxed at the general rate and softened the effects of this decision on the state by providing that it becomes effective only in 2024.
Despite this decision, the Federal Congress enacted, on June 2022, Complementary Law No. 194/2022, which provides that communications and other activities, such as fuels, natural gas, electricity and public transportation, are essential goods and services, and, consequently, limited the ICMS levied on such transactions to the minimum tax rate of each State, which varied at the time from 17% to 18%. Therefore, the imposition of ICMS rates higher than the general rates of each State for the goods and services was prohibited by law from June 2022 onwards.
Due to this reduction, states were expected to have a significant tax collection decrease by the end of 2022, estimated at R$33.5 billion. In order to address and prevent the expected loss, a study by COMSEFAZ, a council of state finance secretaries, recommended state governments raise their general ICMS rate by 4 percentage points from 2023 onwards. In the same cases, the COMSEFAZ study also recommended the ICMS general rate increase of 7 percentage points.
As a result, many states have elected to raise the ICMS general rate as a way to offset their otherwise reduced tax collection. In some states, the general rate of the ICMS has been raised to 22%. The impact of this reduction on our business cannot currently be accurately measured due to a number of variables, such as customer base, future market and, price.
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Also in 2022, Complementary Law No. 190/2022 was enacted to regulate the ICMS levied on interstate operations with final consumers or non-ICMS taxpayers. On interstate sales to final consumers, the ICMS should be split between the state of origin and state of destination, as follows: (a) to the state of origin, the ICMS is calculated with the interstate rate (4%, 7% or 12%); and (b) to the state of destination, the ICMS is calculated based on the difference between the interstate rates used in the transaction and the rate applicable to internal transactions in the state of destination (usually from 17% to 21%), also known as ICMS DIFAL.
According to this law, the ICMS DIFAL should be determined based on a double basis calculation. For us, it should mostly impact our fixed assets acquisitions and, although it should represent an increase in the cash out, the additional tax should be mainly recovered as a credit input on a monthly basis throughout the following four years.
In relation to other taxes, there were some relevant changes regarding the Federal Excise Tax (IPI). In February 2022, the Government issued a decree reducing the tax by 25% on average for several products sold in Brazil. In April, a new decree was enacted, increasing the IPI reduction to 35%, except for products produced in the Manaus Duty-Free Zone (“ZFM”). However, both decrees were suspended by a decision of the Supreme Court to preserve the competitiveness of the ZFM region, which could be harmed by the IPI reduction in the other regions of the country. Companies operating in Brazil are awaiting new determinations by the tax authorities regarding these issues.
From a federal tax perspective, at the end of 2022, there was new relevant tax legislation enacted, including Provisional Measure (“MP”) No. 1,152, which changed the legislation on IRPJ and CSLL, providing for new transfer pricing rules. MP No. 1,152/2022 aims to align the Brazil’s rules with international standards and results from a process aimed at adapting Brazilian standards to those recommended by the Organization for Economic Cooperation and Development (OECD). To this end, there was an amendment to the arm’s length principle and changes to transfer pricing rules which used to be exclusive to Brazil. Its effects are optional from 2023 and mandatory from 2024 onwards. Note, however, that the Provisional Measure has to be converted into Law in up to 120 days (i.e. by June 1, 2023), in order to be current for fiscal years 2023 and 2024.
The other relevant change in 2022 refers to PIS and Cofins. In December of 2022, the Brazilian Federal Revenue Office (“RFB”) published the Normative Instruction (“IN”) No. 2,121/2022, regulating the PIS and COFINS social contributions. In essence, IN No. 2,121/2022 – which replaced IN No. 1,911/19 – consolidated the new guidelines on ascertainment, inspection, collection and administration of the contributions for: (i) PIS/Pasep; (ii) Contribution for the Financing of Social Security (Cofins); (iii) PIS/Pasep-Import; and (iv) Cofins-Import.
Furthermore, on December 30, 2022, Decree No. 11,322/22 reduced by half the PIS/Cofins rates levied on financial income earned by companies subject to the non-cumulative regime. The rates changed from 0.65% and 4% to 0.33% and 2%, respectively. According to the Decree, the reduction would take effect from January 1, 2023. However, on January 2, it was revoked by the newly inaugurated Government, reestablishing the PIS and Cofins rates levied on financial income to its original values.
The tax reform that had been expected for 2022 was not passed into law by the Brazilian legislature. Therefore, a bill that proposed changes in the Corporate Income Tax (“CIT”) regarding: (i) IoE non-deductibility; (ii) the taxation of dividends; and (iii) in an effort to balance these new taxes, a reduction in the CIT rate (from 34% to 29%) was not enacted and so was not applicable for taxable events in 2022. The reduction in the CIT rate presented in the bill was not enough to neutralize the impacts of the end of the IoE deductibility and the taxation of dividends, which would increase the impact on our cash out by 23-26p.p. and generate a negative economic impact on net income of approximately R$185 million in 2022 and approximately R$156 million in 2023. In addition, the minority shareholders will have a negative impact of 5 p.p. on their remuneration and some specialists believe that the impact on TIM’s valuation could reach -10%. Finally, in addition to the changes aforementioned, the bill could interfere in the behavior of economic agents, especially in relation to possible mergers and acquisitions, and stimulate rent-looking at the expense of entrepreneurship, since investments in investment funds will have less taxation than dividends distributed by the companies to their shareholders. However, as the law was ultimately not enacted in 2021 nor 2022, its effects should not apply to the tax periods in 2022 nor 2023.
There is a project, the Social Contribution on Operations with Goods and Services bill, which intends to unify PIS and COFINS into a single contribution of 12% on gross revenue and with a broad credit basis. The bill’s text is under discussion and many sectors are arguing in relation to the relevant increase in their respective tax burdens. At the moment, the text remains undefined and so there are no impacts for our tax liability. Any such changes in tax law could have a material adverse effect on our financial assets and liabilities, if enacted.
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Inflation, and government measures to curb inflation, may adversely affect the Brazilian economy and capital market, our business and operations and the market prices of our common shares or the ADSs.
In the recent past, Brazil has experienced high rates of inflation and the government’s measures taken in an attempt to curb inflation have had significant negative effects on the Brazilian economy. The COVID-19 pandemic has increased market volatility, enhanced existing risks and, despite the resulting contraction of economic activity, the Brazilian economy was still subjectcontinued to suffer from high rates of inflation rates during 2020.2022.
Uncertainty regarding certain future government fiscal measures which may be taken to reduce inflation could affect the confidence of investors and the market in general, and, consequently, affect our operating and financial results and increase volatility in the Brazilian capital markets.
Exchange rate movements and interest rate fluctuation may have an adverse effect on our business and the market prices of our shares or the ADSs.
Appreciation of the real against the U.S. dollar may lead to a deterioration of the country’s current account and the balance of payments, as well as to a dampening of export-driven growth. Any such appreciation could reduce the competitiveness of Brazilian exports and adversely affect net sales and cash flows from exports. Devaluation of the real relative to the U.S. dollar could create additional inflationary pressures in Brazil by increasing the price of imported products, which may result in the adoption of deflationary government policies. The sharp depreciation of the real in relation to the U.S. dollar may generate inflation and governmental measures to fight possible inflationary outbreaks, including the increase in interest rates, which reduces the purchasing power of consumers and raises the cost in the credit market. Devaluations of the real would reduce the U.S. dollar value of distributions and dividends on our common shares and ADSs and may also reduce the market value of such securities. Any such macroeconomic effects could adversely affect our net operating revenues and our overall financial performance.
We acquire equipment and handsets from global suppliers, the prices of which are denominated in U.S. dollars. Depreciation of the real against the U.S. dollar may result in a relative increase in the price of our equipment and handsets. 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. See “Item 5. Operating and Financial Review and Prospects.”
AllAt present, 45% of our current indebtedness is denominated in foreign currency mainly in U.S. dollars(U.S.$), 49% linked to inflation (IPCA) and all subject to cross currency swaps that are tied to Brazilian floating interest rates. Only 6% of the indebtedness is tied to TJLP (Taxa de Juros de Longo Prazo), a rate that is calculated using inflation targets and estimates. Any increase in the interbank deposit certificate (certificado de depósito interbancário) (“CDI”), or CDI, rate may have an adverse impact on our financial expenses and our results of operations. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk.”
The effects of the weak domestic economy could reduce purchases of our products and services and adversely affect our results of operations, cash flows and financial condition.
Although there were expectations for a strong global economy recovery, upon the lifting of the COVID-19 related restrictions due in part to the accelerationsuccess of vaccination campaigns worldwide and the evolution of the pandemic response, the expectations for a full domestic economic recovery are stillin Brazil remain low when compared to certain other countries, dueespecially considering potential economic and political problems. The recent economic instability in Brazil and the deterioration of the political environment have all contributed to a decline in market confidence in the Brazilian economy. Unfavorable macroeconomic conditions in Brazil are expected to continue throughout 2023 as uncertainty remains as to the slower vaccinationshort, medium and long term consequences of the financial, monetary and other policies implemented in response to the COVID-19 pandemic, such as high inflation. Brazil’s slow rate of economic growth, increases and maintenance of high base interest rates, high unemployment rate and to concerns regardinggeneral price increases may limit the national fiscal policy. The Brazilian economy has gone through a steep recession in recent years,availability of credit, income and purchasing power of our customers, thereby adversely affecting demand for our products and impacting our economic results.
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there are uncertainties related to the approval of fiscal and political reforms, and to the new policies to be implemented by the current president.
The economy’s performance directly impacts our results of operations as a result of certain of our assets and liabilities being subject to inflation adjustment, and if inflation rises, disposable income of families may decrease in real terms, leading to lack of purchasing power among our customer base. In response to such tighter credit, negative financial news or declines in income or asset values, consumers and businesses may postpone spending, which could have a material adverse effect on the demand for our products and services. A loss of customers or a reduction in purchases by our current customers could have a material adverse effect on our financial condition, results of operations and cash flow and may negatively affect our ability to meet our growth targets.
We may be impacted by volatility in the global financial markets.
We are susceptible to swings in global economic conditions, typified most recently by difficult credit and liquidity conditions and disruptions leading to greater volatility, which is enhanced by continued tensions between the United States and other commercial partners, such as China. The global economy has largely recovered from the crisis of 2007, however markets remain subject to ongoing volatility factors including interest rate divergence, geopolitical events such as the consequences of Brexit and global growth expectations, and there is no assurance that similar conditions will not arise again. In the long term, as a consequence, global investor confidence may remain low and credit may remain relatively lacking. Hence, additional volatility in the global financial markets may occur.
In June 2016, the United Kingdom had a referendum in which the majority voted to leave the European Union (so-called “Brexit”), and the British government will continue to negotiate the terms of its withdrawal. The exit officially occurred on January 31, 2020. Brexit has created significant economic uncertainty in the UK and in Europe, the Middle East, and Asia. In addition, the terms of Brexit, once negotiated, could potentially disrupt the markets we serve and the tax jurisdictions in which we operate and adversely change tax benefits or liabilities in these or other jurisdictions, and may cause us to lose guests, suppliers, and employees. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the UK determines which EU laws to replace or replicate. These developments, as well as potential crises and other forms of political instability or any other as of yet unforeseen development, may harm our business and the price of our shares and ADSs.
The COVID-19 pandemic, addedand the short, medium and long term consequences of the financial, monetary and other policies implemented in response to the COVID-19 pandemic, has been a new source of uncertainty tofor global economic activity. AuthoritiesDuring the peak of the pandemic, governments and central banks around the world have takenundertook unprecedented measures to try to contain the spread of the disease sincewhilst seeking to protect local economies and consumer confidence. Although the contagion rate for the virus has spread globally. Restrictions willsubsided, the effects of financial and monetary policy put into effect during the pandemic are likely remainto have a continuing effect on the global economy, including in place forBrazil. At the unforeseeable future, suppressing economicbeginning of 2023, markets and social activities, if the contagion rate does not subside.global economy have continued to also be further adversely affected by the ongoing war between Russia and Ukraine and the related sanctions imposed on Russia by the United States and its allies. The materialization of these risks has affected global growth and may decrease investors’ interest in assets located in Brazil, and in other countries in which we do business, which hasmay adversely affectedaffect the market price of our securities, possibly making it more difficult for us to access capital markets and, as a result, to finance our operations in the future.
Additionally, we are subject to impacts resulting from political tension between the United States, Iran and Iraq, as well as other related conflicts in the Middle East. If there is an escalation in tensions and sanctions between the United States, Iran, Iraq and possibly European countries, these tensions can generate political and economic instability around the world, directly impacting the capital market.
Developments and the perception of risk in other countries may adversely affect the Brazilian economy and market price of Brazilian issuers’ securities.
The market value of securities of Brazilian issuers is affected by economic and market conditions in other countries, including the United States, European countries, as well as in other Latin American and emerging market countries. Although economic conditions in Europe and the United States may differ significantly from economic conditions in Brazil, investors’ reactions to developments in these other countries may have an adverse effect on the market value of securities of Brazilian issuers. Additionally, crises in other emerging market countries may diminish investor interest in securities of Brazilian issuers, including our securities. This could adversely affect the market price of our securities, restrict our access to capital markets and compromise our ability to finance our operations in the future on favorable terms, or at all.
In the recent past, there was an increase in volatility in all Brazilian markets due to, among other factors, uncertainties about how monetary policy adjustments in the United States would affect the international financial markets, the increasing risk aversion to emerging market countries, and uncertainties regarding Brazilian macroeconomic and political conditions. These uncertainties adversely affected us and the market value of our securities.
In 2022, the military conflict between Russia and Ukraine contributed to further increases in the prices of energy, oil and other commodities and to volatility in financial markets globally, as well as a new landscape in relation to international sanctions. It is unclear whether these challenges and uncertainties will be contained or resolved, and what effects they may have on the global political and economic conditions in the long term.
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In addition, we continue to be exposed to disruptions and volatility in the global financial markets because of their effects on the financial and economic environment, particularly in Brazil, such as a slowdown in the economy, an increase in the unemployment rate, a decrease in the purchasing power of consumers and the lack of credit availability.
Disruption or volatility in the global financial markets could further increase negative effects on the financial and economic environment in Brazil, which could have a material adverse effect on our business, results of operations and financial condition.
Risks Relating to our Common Shares and the ADSs
Our controlling shareholder has power over the direction of our business.
Telecom Italia, through its ownership of TIM Brasil Serviços e Participações S.A., or (“TIM Brasil,Brasil”), our controlling shareholder, has the ability to determine actions that require shareholder approval, including the election of a majority of our directors and, subject to Brazilian law, the payment of dividends and other distributions. Telecom Italia’s single largest shareholder is Vivendi, which is able to exercise significant influence over Telecom Italia. Telecom Italia may pursue acquisitions, asset sales, joint ventures or financing arrangements or may pursue other objectives that conflict with the interests of other shareholders and which could adversely affect our business, financial condition and results of operations.
Holders of our ADSs are not entitled to attend shareholders’ meetings and may only vote through the depositary.
Under Brazilian law, only shareholders registered as such in our corporate books may attend shareholders’ meetings. All common shares underlying our ADSs are registered in the name of the depositary. A holder of ADSs, accordingly, is not entitled to attend shareholders’ meetings. Holders of our ADSs may exercise their limited voting rights with respect to our common shares represented by the ADSs only in accordance with the deposit agreement relating to the ADSs. There are practical limitations upon the ability of ADS holders to exercise their voting rights due to the additional steps involved in communicating with ADS holders. For example, we are required to publish a notice of our shareholders’ general meetings in certain newspapers in Brazil. Holders of our shares can exercise their right to vote at a shareholders’ general meeting by attending the meeting in person or voting by proxy. By contrast, holders of our ADSs will receive notice of a shareholders’ general meeting by mail from the ADR depositary following our notice to the ADR depositary requesting the ADR depositary to do so. To exercise their voting rights, ADS holders must instruct the ADR depositary on a timely basis. This voting process will take longer for ADS holders than for direct holders of our shares.
We cannot assure you that holders will receive the voting materials in time to ensure that such holders can instruct the depositary to vote the shares underlying their respective ADSs. In addition, the depositary and its agents are not responsible for failing to carry out holder’s voting instructions or for the manner of carrying out your voting instructions. This means that holders may not be able to exercise their right to vote and may have no recourse if our shares held by such holders are not voted as requested.
Holders of our ADSs or common shares in the United States may not be entitled to participate in future preemptive rights offerings.
Under Brazilian law, if we issue new shares for cash as part of a capital increase, we generally must grant our shareholders the right to purchase a sufficient number of shares to maintain their existing ownership percentage. Rights to purchase shares in these circumstances are known as preemptive rights. We may not legally allow holders of our ADSs or common shares in the United States to exercise any preemptive rights in any future capital increase
unless we file a registration statement with the SEC with respect to that future issuance of shares or the offering qualifies for an exemption from the registration requirements of the Securities Act. At the time of any future capital increase, we will evaluate the costs and potential liabilities associated with filing a registration statement with the SEC and any other factors that we consider important to determine whether to file such a registration statement. We cannot assure holders of our ADSs or common shares in the United States that we will file a registration statement with the SEC to allow them to participate in a preemptive rights offering. As a result, the equity interest of those holders in us may be diluted proportionately.
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Cash dividends, interest on shareholders’ equity and other cash distributions, as well as judgments seeking to enforce our obligations in respect of our shares or ADSs in Brazil will be payable only in reais.
We pay any cash dividends, interest on shareholders’ equity and any other cash distributions with respect to our common shares in reais. Accordingly, exchange rate fluctuations affect the U.S. dollar amounts received by the holders of ADSs on conversion by the depositary of dividends and other distributions in Brazilian currency on our common shares represented by ADSs. Fluctuations in the exchange rate between Brazilian currency and the U.S. dollar affects the U.S. dollar equivalent price of our common shares on the Brazilian stock exchanges. In addition, exchange rate fluctuations may also affect our dollar equivalent results of operations. See “Item 5. Operating and Financial Review and Prospects.”
If proceedings are brought in the courts of Brazil seeking to enforce our obligations with respect to our shares or ADSs, we will not be required to discharge our obligations in a currency other than reais. Under Brazilian exchange control limitations, an obligation in Brazil to pay amounts denominated in a currency other than reais may only be satisfied in Brazilian currency at the exchange rate, as determined by the Central Bank, in effect on the date the judgment is obtained, and such amounts are then adjusted to reflect exchange rate variations through the effective payment date. The then prevailing exchange may not afford non-Brazilian investors with full compensation for any claim arising out of or related to our obligations under our shares or the ADSs. See “—A. Selected Financial Data—Exchange Rates” for information regarding exchange rates for the Brazilian real.
Holders of ADSs or common shares could be subject to Brazilian income tax on capital gains from sales of ADSs or common shares.
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 resident individuals 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 at Low or Nil Tax Jurisdictions (i.e., a country that does not impose any income tax or that imposes tax at a maximum rate of less than 20% or 17%, depending ifon whether the country is aligned with the international standards of fiscal transparency). Although we believe that the ADSs will not fall within the definition of assets located in Brazil for the purposes of Law No. 10,833/2003, considering its general and unclear scope 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. See “Item 10. Additional Information—E. Taxation—Brazilian Tax Considerations.”
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. Gains realized through transactions on Brazilian stock exchanges are exempt from the Brazilian income tax, provided that the transactions are carried out in accordance with the Brazilian National Monetary Council’s (Conselho Monetário Nacional), or CMN’s, Resolution CMN 4,373 (that replaced Resolution CMN 2,689) and the foreign investor is not located in Low or Nil Tax Jurisdictions. Gains realized through transactions with Brazilian residents or not executed on the Brazilian stock exchanges are subject to tax at a rate (1) that may vary between 15% and 22.5% depending on the capital gain amount if the investors are located in regular taxation jurisdictions, or (2) of 25% if the capital gain is realized by investors located in Low or Nil Tax Jurisdictions.
Please refer to “Item 10. Additional Information––E. Taxation––Brazilian Tax Considerations––Taxation of Gains.”
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An exchange of ADSs for common shares risks loss of certain foreign currency remittance and Brazilian tax advantages.
The ADSs benefit from the certificate of foreign capital registration, which permits J.P. Morgan Chase Bank, N.A., or (“J.P. Morgan,Morgan”), as depositary, to convert dividends and other distributions with respect to common shares into foreign currency, and to remit the proceeds abroad. Holders of ADSs who exchange their ADSs for common shares will then be entitled to rely on the depositary’s certificate of foreign capital registration for five business days from the date of exchange. Thereafter, they will not be able to remit non-Brazilian currency abroad unless they obtain their own certificate of foreign capital registration, or unless they qualify under Resolution CMN 4,373, which entitles certain investors to buy and sell shares on Brazilian stock exchanges without obtaining separate certificates of registration.
If holders of ADSs do not qualify under Resolution CMN 4,373, they will generally be subject to less favorable tax treatment on distributions with respect to our common shares. There can be no assurance that the depositary’s certificate of registration or any certificate of foreign capital registration obtained by holders of ADSs will not be affected by future legislative or regulatory changes, or that additional Brazilian law restrictions applicable to their investment in the ADSs may not be imposed in the future.
Brazilian law allows for the Brazilian government to impose temporary restrictions, whenever there is a significant imbalance in Brazil’s balance of payments or a significant possibility that such imbalance will exist, on the remittance to foreign investors of the proceeds of their investments in Brazil, as well as on the conversion of the real into foreign currencies. The Brazilian government may, in the future, restrict companies from paying amounts denominated in foreign currency or require that any such payment be made in reais.
If similar restrictions are introduced in the future, they would likely have an adverse effect on the market price of our shares and ADSs. Such restrictions could hinder or prevent the holders of our shares or the custodian of our shares in Brazil, J.P. Morgan, from remitting dividends abroad.
A more restrictive policy could also increase the cost of servicing, and thereby reduce our ability to pay, our foreign currency-denominated debt obligations and other liabilities. If we fail to make payments under any of these obligations, we will be in default under those obligations, which could reduce our liquidity as well as the market price of our common shares, shares and ADSs.
Item 4. | Information on the Company |
A. History and Development of the Company
Basic Information
TIM S.A., formerly known as Intelig Telecomunicações Ltda., a publicly held company (sociedade anônima) organized under the laws of the Federative Republic of Brazil, incorporated in the Federative Republic of Brazil for an indefinite period on March 9, 1998.
Our headquarters are located at João Cabral de Melo Neto Avenue, 850 – South 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.annual report.
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Historical Background
Privatization and summary
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. (“TSU”), or TSU, and Tele Nordeste Celular Participações S.A., or TND. (“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 as described below, and we area majority of our share capital is 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. On February 17, 2023, TIM Brasil obtained registration by the CVM as a publicly-held company in category B. 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.
Acquisition of Intelig
In 2009, the acquisitionwe acquired 100% of Intelig’s share capital from Holdco Participações Ltda., or Holdco, holder at the time of 100% of Intelig’s capital, was approved and As a result, Intelig became a wholly owned subsidiary of TIM after this transaction.our wholly-owned subsidiary. The acquisition of Intelig (known since(prior to being renamed TIM S.A. in September 2017 as TIM S.A.)and being merged in the Reorganization) brought material advantages through significant synergies with its network, such as its metropolitan optimal fiber optic network and its large backbone that allowed us to accelerate the development of our 3G network and generate significant operational cost savings.
Merger of TIM Celular
In 2011, TIM Celular which(which was subsequently merged into the Company as a result of the Reorganization,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.Acquisition”). In connection with the acquisition, Eletropaulo Telecomunicações changed its corporate name to TIM Fiber SP Ltda., or (“TIM Fiber SP,SP”), and AES RJ changed its corporate name to TIM Fiber RJ S.A., or (“TIM Fiber RJ.RJ”). Both entities were collectively referred to as TIM Fiber. In accordance with the corporate reorganization of TIM Fiber, TIM Fiber RJ and TIM Fiber SP were merged into TIM Celular in 2012, which was the former entity that used to own and operate the fiber optic network in metropolitan São Paulo and Rio de Janeiro (and which, as discussed below, itself was merged into the Company 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.
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.Reorganization
On July 25, 2017, TIM’s Board of Directors approved the corporate reorganization or the Reorganization,(the “Reorganization”), of its then 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 reorganizationReorganization resulted in the merger of TIM Celular into the Company. 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.
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Merger and succession of NYSE and B3 listing
On July 29, 2020, the shareholders of TIM Participações (our former parent holding company) and theour shareholders of the Company approved, by a majority of votes, the merger of the first into the latter, pursuant to the terms of the Protocolo e Justificação de Incorporação. On July 29, 2020, the boards of directors of each of TIM Participações and the Company approved the execution of a Merger Agreement (protocolo de incorporação) with the Company. TIM Participações merged with and into the Company, previously a wholly owned subsidiary of our former parent holding company TIM Participações (the “Merger”), which became effective on September 28, 2020. Consequently, TIM Participações, our former parent holding company, was merged into the Company as a result of the Merger. The common shares of TIM Participações had been listed on the Novo Mercado segment of the B3 S.A. – Brasil, Bolsa, Balcão or the B3,(the “B3”) (the São Paulo stock exchange) since 2011. In order to be listed on the Novo Mercado, we are required to comply with heightened requirements relating to corporate governance and the disclosure of information to the marketrequirements and we are not permitted to issue preferred shares, participation bonuses or any kindtype of shares withthat have restricted voting rights. On September 28, 2020, as a result of the Merger, TIM Participações ceased to exist as a separate entity, and TIM continued as the surviving corporation in the Merger, with TIM succeeding to all rights and obligations of TIM Participações pursuant to Brazilian corporate law and TIM became the successor registrant under Rule 12g-3(a) under the Exchange Act. On September 28, 2020, the B3 approved the listing of the Companymerged company and the admission to trading of its shares on the Novo Mercado.Mercado. On September 28, 2020, TIM filed a form 6-K pursuant to Rule 12g-3(a) promulgated under the Exchange Act to report this succession in accordance with Rule 12g-3(f) promulgated under the Exchange Act. Pursuant to Rule 12g-3(a) under the Exchange Act, TIMTIM’s common shares and TIM ADSs, as common shares and ADSs of the successor issuer, were deemed registered under Section 12(b) of the Exchange Act. TIM Participações S.A.’ses’s common shares and ADSs continued to be traded until October 13, 2020 when Company’sour common shares and ADSs started to trade on the B3 and the NYSE, respectively. See “Item 9. The Offer and Listing—A. Offer and Listing Details.”
Joint acquisition of Oi Group’s mobile business
On March 10, 2020, we disclosed to the market that we, jointly with Telefônica Brasil S.A. (“Vivo”), expressed to Oi Group’s financial advisor, Bank of America Merrill Lynch (“BofA”), our interest in a potential joint acquisition of all or a part of Oi Group’s UPI mobile business. On July 18, 2020, we, together with Vivo and Claro S.A. (“Claro”), submitted a binding offer to Oi Group for the acquisition of all of the mobile assets of the Oi Group, or the UPI Mobile Business. The offer was revised on July 27, 2020 and September 7, 2020 and the latter offer was accepted by Oi Group on December 14, 2020. On December 14, 2020, TIMwe, along with CLAROClaro and VIVO, wasVivo, were declared the winnerwinners of the competitive process of the sale of assets of the mobile telephony operation (Personal Mobile Service) of the OIOi Group. In February 2022, the transaction received regulatory approval from CADE and Anatel. Closing of the transaction occurred on April 20, 2022. See ―”2022 Important Events.”
As a result of closing the transaction, we became the owner of 100% of the share capital of SPE Cozani, a company that holds part of the assets, rights and obligations business unit of Oi Móvel S.A. – Under Judicial Reorganization (“Oi Móvel”). The price for 100% of the shares of SPE Cozani, after all the adjustments provided for in the Share Purchase Agreement (“SPA”), was R$6.98 billion. Pursuant to the SPA, of the Adjusted Closing Price: (i) R$ 634.33 million was withheld by us, mostly for the purposes of covering any additional price adjustments that may need to be made and which may be identified in the 120 days following the closing; (ii) R$2.06 billion was transferred directly to BNDES - National Bank for Economic and Social Development, per a contractual provision; and (iii) the balance of R$4.29 billion was paid directly to the Seller.
With the acquisition completed, our business has taken a significant step forward at a national level, allowing us to compete even more effectively with our main competitors with regard to infrastructure and broad geographic representation of our customer base.
Following the closing of the acquisition, on October 3, 2022, we, Claro and Vivo commenced an arbitration procedure before the Market’s Chamber of Arbitration (“CAM/B3”) against Oi Group in order to dispute the post-closing price adjustment of the transaction. TIM, Claro and Vivo are seeking an indemnification of R$3.1 billion of which TIM is entitled to approximately R$1.4 billion.
Partnership with C6 Bank
On March 26, 2020 we entered into a commercial agreement with Banco C6 S.A. (“C6 Bank”), pursuant to which we have been granted, on February 1, 2021, the right to subscribe for an indirect equity interest of approximately 1.4% of C6 Bank through the exercise of subscription bonuses, subject to certain agreed upon thresholds. By the end of 2022, we had vested rights to subscribe for an indirect equity interest of approximately 5.52% of C6 Bank.
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However, certain elements of this partnership are currently being disputed and so we may not obtain all of the expected benefits of the partnership. We commenced an arbitration procedure No. 28/2021/SEC8 before the Arbitration and Mediation Center of the Brazil-Canada Chamber of Commerce by TIM against C6 Bank, Carbon Holding Financeira S.A. and Carbon Holding S.A., pertaining to the interpretation of certain contractual clauses of the contracts governing the partnership between the parties. As a potential result of this arbitration, the strategic partnership may be terminated.
TIM and Vivo new sharing agreement
In September 2020, the competent authorities (CADE and Anatel) approved the new sharing agreement established between TIM and Vivo, for: (i) sharing of the 2G network, allowing one operator to switch-off its 2G network, where both parts are currently present, and the remaining operator will provide “roaming like” services for the customers of both operators and (ii) establishing new infrastructure sharing agreements for the 3G and 4G network (Single-Grid), directed to cities with fewer than 30,000 inhabitants, which in the future may be expanded to larger cities. We believe that carrying out this agreement 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.
In relation to our sharing of the 2G network, the renowned GWCN (Gateway Core Network) technical solution was approved and carried out during 2021, while quality KPIs were monitored. As a result of the sharing agreement, TIM switched-off its 2G network in five cities in the state of Espírito Santo and seven cities in the state of São Paulo; Vivo switched-off four cities in the state of Rio de Janeiro and eight cities in the state of São Paulo. All the switched-off cities had less than 30,000 inhabitants and were each already covered by access to 3G or 4G.
With respect to the single grid agreement, each party was able to increase its 3G and 4G coverage in more than 300 cities with a total of 422 shared sites, as of May 2021. The agreement remains in force and includes a detailed rollout that is now expected to be concluded by 2024.
TIM and Stellantis connected cars partnership
In October 2020, we and Fiat Chrysler Automóveis (FCA), now known as Stellantis, established a partnership to offer connectivity solutions embedded in vehicles of the Fiat, Jeep and RAM brands in Brazil from the first half of 2021. As part of the global strategy of developing ecosystems for connected services and to enhance the digital experience of customers, future Stellantis launches in the country will rely on eSIM, with the LTE coverage quality and our IoT network. As a result, future Stellantis vehicle launches in Brazil will have access to native Wi-Fi onboard eSIM and the cars’ active and real-time communication with the user, the Stellantis and the dealer network. In addition to such features, this technology will focus on safety, allowing remote identification of possible vehicle failures with the possibility of more agile and accurate diagnoses.
During 2021, a Proof of Concept (“PoC”) was launched in the Stellantis factory in Goiana/PE using 5G connectivity to investigate the benefits of this technology and enabling the use of new applications on a large scale, from the use case of artificial intelligence to the automated processing of images. The PoC evolved in 2022 to a new phase which will enable an Edge 5G SA Private Core and an Edge Cloud environment, achieving greater computing capacity, greater scalability, and allowing the application to perform in an environment with higher throughput and low latency.
Partnership with TIP and INATEL
Also in October 2020, we announced a partnership with Telecom Infra Project (“TIP”), for developing OpenRAN (Open Radio Access Network) technology by means of the Open Field Program. The initiative will be hosted by INATEL (Instituto Nacional de Telecomunicações) in the city of Santa Rita do Sapucaí, in the state of Minas Gerais, Brazil. The goal is to create an adequate environment (living lab) to test, validate and accelerate products and new functionalities of open and disaggregated technologies solutions for Radio Access Network, by performing network testing, product validation, feature analysis and recommendation based on friendly users’ usage and feedback. The program has taken place since 2021. Additionally, at the end of 2022, the Open RAN 5G SA TIP test plan for network access with the vendor was completed and the TIP internal process to obtain the Silver Badge began and is expected to be completed after the review and approval of the deliverables. This Silver Badge demonstrates testing of a product, combination or solution for alignment with TIP-defined requirements, typically in a controlled environment. The specific tests required for a particular badge are established by TIP’s project groups and comprise a significant subset of all tests required for deployment.
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I-Systems (formerly FiberCo) Formation and Sale of Equity Interest
On December 10, 2020, our Board of Directors approved the formation of FiberCo, in preparation for a possible future segregation of assets and provision of fiber infrastructure services. This process is under evaluationone of CADE.
2020 Important Events
Mergerthe intermediate steps in the transformation of TIMour broadband services, and it aims to create an open fiber infrastructure vehicle to allow us to attract a strategic partner as a shareholder of FiberCo. We expect FiberCo to operate in the wholesale market and to provide fiber connectivity services for last-mile and a transport network, for all market operators, having us as an anchor customer. We expect FiberCo to allow us to achieve our expected growth in the Brazilian fiber market in the coming years, taking advantage of the open network approach and using a focused operating model. This transaction aims to accelerate the growth of our residential broadband business and unlock additional value from our existing infrastructure. Accordingly, on March 3, 2021, we entered into an exclusivity agreement with IHS Brasil Participações S.A.Ltda. (“IHS”), a large and diversified provider of telecommunications infrastructure, to negotiate the terms and conditions for the acquisition of an equity interest in FiberCo by IHS. The operation was approved by CADE on June 16, 2021 and by Anatel on November 11, 2021.
On November 16, 2021, after regulatory authorizations from Anatel and CADE, IHS Fiber Brasil – Cessão de Inraestruturas Ltda. (“IHS Fiber”), acquired from us an equity interest in FiberCo, a company that was incorporated by us to segregate network assets and provide infrastructure services.
As a result of the transaction, IHS Fiber changed the name of the acquired entity to I-Systems and currently holds 51% of I-Systems’s share capital, with the remaining 49% held by us.
Partnership between TIM and Cogna
On July 29, 2020,7, 2021, we informed our shareholders, the boards of directors of TIMmarket in general and other stakeholders that, together with Anhanguera Educacional Participações S.A. (“AESAPAR”), a subsidiary of Cogna Educação S.A. (“Cogna”), jointly referred to as “Partners”, it completed the negotiations regarding a strategic partnership (“Partnership”) with the objective of developing offers combined with special benefits aimed at providing distance education through the Ampli platform, reaching over 280,000 users enrolled in undergraduate courses and open courses in 2022.
On February 15, 2023, the partners agreed amicably to call off the partnership. We are negotiating a new partnership with an educational group in Brazil to offer greater value and exclusive benefits to our customer base and expand access to digital education services.
Partnership between TIM and FS Group
In line with our customer platform strategy, following on from a number of other strategic partnerships, in May 2022 we entered into a new strategic partnership with FS Security to establish a new company dedicated to digital security solutions and entertainment for end consumers while also making it available as a white-label model for other operators.
FiberCo’s operations include approximately 15,000 km of fiber in a secondary network, covering approximately 7.5 million homes (homes passed), 4.5 million of which are FTTH (fiber to the home) and 3.4 million are FTTC (fiber to the curb), which constitute the initial base of assets transferred by TIM. The homes connected account for approximately 700,000 over which FiberCo will provide operation and maintenance services to TIM. Moreover, approximately 140 employees were transferred to FiberCo, as well as other assets and contracts, all exclusively related to the scope of its activities.
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With the completion of the Companyacquisition, FiberCo changed its corporate name to I-Systems, and began its journey as an infrastructure vehicle with the mission of deploying, operating and maintaining last-mile infrastructure for broadband access to be offered in the wholesale market, having us as an anchor customer.
5G Auction in 2021
In November 2021, the 5G auction was held. In the auction, we acquired 11 lots, with a total value offered of R$1.05 billion, in three frequency bands: 3.5 GHz, 2.3 GHz and 26 GHz. The acquired bands have a set of obligations that must be met with financial contributions or the construction of mobile and fixed network infrastructure. As a result, we have rights to the spectrum capacity that we consider necessary to follow our growth journey in the mobile telephony market nationwide, as well as preparing ourselves for customers’ demands and the ability to explore new use applications and develop innovative solutions that require high-speed connectivity and capacity.
The main commitments associated with each band are as follows:
· | 2.3 GHz: 4G coverage in ~1,000 localities (in the South and Southeast Regions of Brazil, not including the state of São Paulo); |
· | 3.5 GHz: 5G coverage in all municipalities with a population equal to or greater than 30,000 inhabitants until 2029, plus fiber backhaul obligations in 138 municipalities plus additional contributions to a new entity (EAF) to carry out the following projects: clean-up 3.5 GHz, deployment of fiber in Amazonia and building a private network for exclusive federal government use; and |
· | 26 GHz: contributions to a new entity (EACE) to carry out connectivity schools projects. |
2022 Important Events
TIM elects new Chief Executive Officer (CEO)
On January 31, 2022, our Board of Directors announced that Mr. Alberto Mario Griselli would replace Mr. Pietro Labriola in the positions of Chief Executive Officer (“CEO”) and Board member. Mr. Griselli, who held the position of Chief Revenue Officer (CRO) from July 2019 to August 2022, holds a degree in Electronic Engineering from La Sapienza University in Rome and an MBA in finance from Columbia University. With over 20 years of experience in the telecommunications industry, he has held relevant positions such as Vice-President for Latin America at TIM, a global provider of mobile engagement solutions for telecom operators, and Chief Executive Officer for Brazil and for Latin America at Value Partners, a management consulting global firm. In addition, on February 1, 2023, he assumed the positions of Investor Relations Officer and Chief Financial Officer on an interim basis, the latter of which he held until a replacement was appointment on February 27, 2023.
Anatel grants consent to transfer control of Oi’s mobile telephony activities
On January 31, 2022, Anatel, unanimously granted its consent to the closing of the sale of the mobile telephony activities of Oi Móvel S.A. – Under Judicial Reorganization (the “Oi Transaction”), via three specific purpose entities, which correspond to the assets acquired by us, Vivo and Claro S.A. (together, the “Buyers”).
The consent provides for certain conditions, in line with a transaction of this nature, which mainly aim to guarantee access by small providers to nationwide networks, maintain commitments linked to the transferred radio frequencies, establish the minimum parameters of the communication plan linked to the transaction and grant users certain rights in the migration phases.
CADE approves the acquisition of most of the Oi mobile assets by TIM
On February 9, 2022, CADE under the of Concentration Act 08700.000726/2021-08, approved the Merger,closing of the Oi Transaction, subject to certain conditions, mostly behavioral, and which became effectivewere recorded in a Concentration Control Agreement (the “CC Agreement”) between the Buyers and CADE. These conditions can be used by new entrants and smaller operators to reduce entry barriers and enable the exploration of different business models, without affecting TIM’s main objective of strengthening its infrastructure and closing the capacity gap spectrum compared to its main competitors. The CC Agreement was designed to strike a balance between creating value while mitigating competition concerns.
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We have continued to comply with all the measures put in place by Anatel and the CC Agreement, for example:
On April 19, 2022, we provided Anatel with a reference offer for the national roaming market. The reference offer was approved by Anatel on September 28, 2020. The Merger was part of a reorganization of TIM’s corporate group. The business carried out by TIM following the Merger was21, 2022. On the same asdate, we provided a reference offer for providing the business previously carried outmobile services through a virtual network, which was approved by TIM Participações priorAnatel on September 26, 2022.
On July 4, 2022, we independently offered to the Merger. Upon the consummation of transaction and the approvalsell up to 50% of the listingRadio Base Stations (“ERBs”) that we had purchased from Oi Móvel (“ERBs Public Offerings”).
On July 5, 2022, we, together with Oi, signed a letter of Company’s common sharesintent to ensure the maintenance and ADSs by B3 and NYSE, respectively, TIM Participações S.A.’s shareholders received one sharecontinuity of mobile services provided at the Comandante Ferraz Antarctic Station - EACF until the end of the CompanyCooperation Agreement no. 12000/2019-001/00, February 21, 2024, concluded on February 21, 2019 by the Union, through the Navy Command, and by Telemar Norte Leste and Oi Móvel.
On August 15, 2022, we signed a Radio Frequency Availability Agreement with Oi Móvel in exchangeorder to allow Oi Móvel to meet its targets for each TIM Participações share that they held,implementing fixed wireless access systems to ensure compliance with the General Plan for Fixed Telephony Services in Public Regime (“PGMU-IV”), approved by Decree-Law 9,619/2018.
On October 20, 2022, we published reference offers to enable the execution of the Industrial Network Exploration Agreement and Onerous Temporary Agreement Assignment of Rights to Use Radiofrequency, in accordance with the terms defined by the CC Agreement.
On December 20, 2022, we published offers to enter into a contract for the Onerous Temporary Agreement Assignment of Rights to use the Merger Agreement.900 MHz radiofrequency that we had acquired in the Oi Transaction.
Capital Expenditures
Capital expenditures totaled R$3,891 4,730 million in 2020, up 1.0%2022, a decrease of 40.6% as compared to 2019, as found2021. This result was mainly due to the registration of investments in the Industrial Plan 2020-2022. This increase wasacquisition of licenses in the frequency auction in 2021. Excluding this effect, capital expenditure for 2022 would have grown 8% year-over-year due to the investments linked to expand coverage, installing more equipment and fiber.. Approximately 92%the integration of capital expenditures were dedicatedOi’s mobile assets, in addition to infrastructure, mainly transportation network projects, 4Gthe implementation of 5G technology and information technology.in Brazil. 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.crises. For a detailed breakdown of our capital expenditures in 2018, 20192022, 2021 and 2020 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,December 30, 2021, we released our Industrial Plan for 2020-2022,2022-2024, which demonstrates our transformation as a resultillustrated some of the executiontransformation that we have been able to achieve as the result of our previous Industrial Plans. These changesachievements include, notably, network improvements and an improved customer experience, as recognized by independent third parties, and ongoing innovations in network evolution, including our 5G trials,rollout – pursuing traffic offload, 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 (known as refarming), and the Vivo MoU (see Item“Item 4. Information on the Company—B. Business Overview—Our Business)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 in our view will result in a positive transformation for all stakeholders.
We expect that our IT initiatives such as our big data evolution, the rollout of “next best action,” or NBA, cognitive systems, and our application and architecture review, in a two-year time frame will enable us to advance our IT systems in such a mannerway that will provideenable us withto have 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.opportunities and network decommissioning savings.
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The capital expenditure expected to support the Industrial Plan for 2021-2023 is2022-2024 was approximately R$13.0 billion, considering TIM S.A. operationour operations on a standalone approach, andbasis, or R$13.5 billion considering the combination of our operations with the UPI Oi Mobile Assets as a result of the Oi Transaction for that three-year period. Some smart capital expenditure initiatives in development our infrastructure areinclude disruptive business models withfor our infrastructure. With the usageuse of new technologies, such as Massive-MIMO technology, and with network sharing agreements, we expect it will be possible for us to achieve localitiesprovide services in locations that were not previously financially viable orviable.
On February 23, 2022, we updated our strategic plan following a year of consistent improvements, which included the Massive-MIMO technology;successful achievement of our short-term objectives outlined in our previous strategic plan for 2021-2023. We managed to implement our strategy to achieve these objectives despite a more pressured and unstable macroeconomic environment that had generally frustrated previous market projections. In this context, our focus on execution, with flexible decision making and appropriate prioritization, was crucial.
For the next three year period, our plan takes into account (i) the estimated effects of the acquisition of the assets of Oi Móvel since the transaction received regulatory approval from the sector regulator (Anatel) and the competition regulator (CADE) (see material facts of January 31 and February 9, 2022); (ii) the effects of the beginning of the adoption of 5G technology and the obligations and commitments that we agreed to as part of our competitive bids in the 5G frequency auctions, (see material fact disclosed on November 5, 2021) in Brazil; and (iii) the change to a new coverage growth model for our residential broadband service after the segregation of our network sharing agreements.assets and incorporation of I-Systems, (see material fact disclosed on November 16, 2021). Under this new set of assumptions, we also reaffirm our commitment to (i) the sustainable evolution of service revenue; (ii) the improvement of our operating cash generation; (iii) maintain an adequate capital allocation, characterized by the capital expenditure allocated to network and IT infrastructure that improve our operational efficiency and customer experience; and (iv) the continuous expansion of cash flow as a combination of all of the above factors.
In additionOn February 14, 2023, we updated our strategic plan for 2023-2025, which reflected the full achievement of our short-term goals outlined in the 2022-2024 Plan, demonstrating the success of the strategy and consistent execution throughout 2022. These results were achieved in a year of great challenges and uncertainties in the external environment, but of great opportunities and sectoral transformations, in which we are the protagonist: the launch of 5G technology and the end of the cycle of consolidation of the mobile market. For this new triennium, we project an improvement in overall business dynamics, driven by the combination of a larger revenue base with a solid margin recovery trend and better capital expenditure efficiency opportunities and a clear path to optimization of lease spending. This dynamic will provide an expansion of cash flow, generating additional space for shareholder remuneration.
5G launched in 2022
Following our investment in network infrastructure, in March 2022, we announced the assumptions listed above, the processcompletion of integrating Oi’s mobile assets, acquiredour standalone 5G network core. This was necessary for us to be able to provide fifth-generation services in accordance with government requirements. Anatel approved a revised schedule for granting access to the Material Facts published3.5 GHz spectrum band in order to activate the 5G network in the Brazilian capital and Federal District of Brasília after August 2022, commencing the commercial operations of 5G Standalone (5G SA) throughout Brazil. In 2022, we began the rollout and now have 5G coverage in Brasília and all 26 state capitals, with a special focus on the market on December 14, 2020cities of São Paulo, Rio de Janeiro and January 29, 2021, but still pending approval by regulatory bodies, will significantly transform our results, which is why we present a long-term vision focused on the continuity of our operations considering the impactsCuritiba, where 100% of the merger.neighborhoods were covered, and where we have the highest number of sites compared to our competitors.
Recent Developments
FiberCo FormationIn early 2023, we became the first and Sale of Equity Interest
On December 10, 2020, our Board of Directors approved the formation of FiberCo Soluções de Infraestrutura Ltda., or FiberCo, in preparation for a possible future segregation of assets and provision of fiber infrastructure services. This process is oneonly telecommunications operator covering 100% of the intermediate stepsmunicipalities in the transformation of our broadband services, and it aimsBrazil, in addition to create an open fiber infrastructure vehicle to allows us to attract a strategic partner as a shareholder of FiberCo. We expect FiberCo to operate5G coverage in the wholesale market and to provide fiber connectivity services for last-mile and transport network, for all market operators, with the Company as an anchor customer. We expect FiberCo to allow us to achieve the expected growth in the Brazilian fiber market in the coming years, taking advantage of the open network approach and a focused operating model. This transaction aims to accelerate the growth of the residential broadband business and unlock additional value from our existing infrastructure. Accordingly, on March 3, 2021, we entered into an exclusivity agreement with IHS Brasil Participações Ltda., or IHS, a large and diversified provider of telecommunications infrastructure, to negotiate the terms and conditions for the acquisition of equity interest, by IHS, in FiberCo.state capitals. As ofat the date of this annual report, this negotiation is still ongoing.
TIMour network covers 100% of 5570 Brazilian cities, making us what we believe to be the first and Vivo new sharing agreement
only private service company to be present in all cities in Brazil. In September 2020,Brazil, 4G connectivity continues to prevail throughout the competent authorities (Cade and Anatel) approved the new sharing agreement established between TIM and VIVO, for: (i) sharing of the 2G network, allowing one operator to switch-off its 2G network, where both parts are currently present, and the remaining operator will provide “roaming like” services for both customer base; and (ii) establish new infrastructure sharing agreements for the 3G and 4G network (Single-Grid), directed to cities with fewer than 30,000 inhabitants, which in the future may be expanded to larger cities. We believe that implementing the concepts set forth therein 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.country.
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TIMOn January 17, 2023, Ms. Camille Loyo Faria resigned from the position of Chief Financial Officer (“CFO”) and Fiat Chrysler Automóveis (FCA) connected cars partnership
In October 2020, TIM and Fiat Chrysler Automóveis (FCA) have established a partnership to offer connectivity solutions embedded in vehiclesInvestor Relations Officer (“IRO”) of the Fiat, Jeep and RAM brandsCompany, remaining in Brazil from the first half of 2021. As part of the global strategy of developing ecosystems for connected services and to enhance the digital experience of customers, future FCA launches in the country will rely on eSIM, with the LTE coverage quality and TIM's IoT network.office until January 31, 2023. As a result, future FCA vehicle launchesfrom February 1, 2023, Mr. Alberto Mario Griselli, our CEO, assumed on an interim basis, the positions of CFO and IRO of the Company.
Registration of our controlling shareholder as a Category B public company in Brazil will have access
On February 17, 2023, TIM Brasil, our controlling shareholder, obtained registration in Brazil as a publicly held company in category B. Public companies registered in category B in Brazil may issue securities other than shares, share certificates or depository receipts, or securities convertible into such securities.
On February 27, 2023, the Board of Directors appointed Ms. Andrea Palma Viegas Marques to native Wi-Fi onboard eSIMthe position of CFO while Mr. Alberto Mario Griselli retained his position as CEO and IRO. Ms. Viegas has a degree in Business Administration from Cândido Mendes University, and a Master’s in Business Administration from Ibmec and currently holds the cars’ activeposition of Executive Director of Planning and real-time communication withControl at the user,Company. Ms. Viegas has more than 20 years’ experience in the FCAtelecommunications sector, including 17 years within the TIM Group, performing different functions in the financial, marketing and technology areas. Throughout her career she has also worked in the dealer network. In addition to such features, this technology will focus on safety, allowing remote identification of possible vehicle failures with the possibility of more agileOil &Gas industry, Audit and accurate diagnoses.Human Resources sectors.
Also in October 2020, TIMOn February 28, 2023, we announced a partnership with TIP (Telecom Infra Project), for developing OpenRAN (Open Radio Access Network) technology by means of the Open Field Program. The initiative will be hosted by INATEL (Instituto Nacional de Telecomunicações) in the city of Santa Rita do Sapucaí, in the state of Minas Gerais, Brazil. The goal isUpload Ventures Growth, LP (“Upload”) – an independent venture capital manager – to create an adequate environment (living lab) to test, validate and accelerate products and new functionalities of open and disaggregated technologiesinvestment fund (“5G Fund”) focused on solutions for Radio Access Network, by performing network testing, product validation, feature analysis and recommendation based on friendly users’ usage5G technology. The investments aimed to develop early-stage companies (including startups and feedback. The program is scheduledscaleups) from different sectors, particularly those that already have established business models. In addition to beginfinancial contributions through the 5G Fund, the companies we invest in 2021,will be able to rely on having access to our industrial and will last until 2022.
Partnership with C6 Banktechnological assets in order to leverage their growth.
On March 26, 2020 we entered into30, 2023, our shareholders approved our merger with SPE Cozani (then a commercial agreement with Banco C6 S.A. (“C6 Bank”),wholly-owned subsidiary) pursuant to which we have been granted, on February 1, 2021, the right to subscribe an indirect equity interest of approximately 1.4% in C6 Bank through the exercise of subscription bonuses,SPE Cozani would be merged into us, subject to certain agreed upon thresholds.
Oi Group’s Mobile Assets Acquisition
conditions, including authorization by Anatel and the closing processes that are required under Brazilian corporate law to consummate the merger of two companies, pursuant to the Protocol and Justification of incorporation. On March 10, 2020, we disclosed to31, 2023, our Board of Directors confirmed satisfaction of all the market that we, jointly with Telefônica Brasil S.A. (VIVO), expressed to Bank of America Merrill Lynch, or “BofA”, Oi Group’s financial advisor, our interest in a potential joint acquisition of Oi Group’s UPI mobile business, in whole or in part, so that, in the event of the completion of the operation, each of the interested parties would receive a portion of that business.
We believe that the transaction would have the potential to add +14.5 million clients, +7.2 thousand sitesclosing conditions and towers, +49 MHz of spectrum to our operations, enabling us to close historical operational and structural gaps, generating benefits for our customers and shareholders, by accelerating our growth, increasing operational efficiency and quality of service.
On July 18, 2020, we submitted, together with VIVO and Claro S.A. (CLARO) a binding offer to Oi Group for the acquisition of the totality of the mobile assets operation of the Oi Group, or the UPI Mobile Business, as revised on July 27, 2020 and September 7, 2020. The latter was accepted by Oi Group on December 14, 2020.
Pursuant to our offer, the total amount of the transaction is R$16.5 billion plus the value of the compensation offered to the Oi Group for certain take-or-pay data transmission capacity agreements, to be executed at the time ofapproved the closing of the transaction. Such agreements have a net present value corresponding to approximately R$819 million as of December 31, 2020. The R$16.5 billion amount includes R$15.7 billion related to the base price of the offer and R$756 million corresponds to transition services to be rendered for up to twelve months by Oi Group, ofmerger with SPE Cozani, which TIM will be responsible for R$318 million. We expect to disburse R$7.3 billion, or 44% of the total base price and transition services. Concerning the capacity agreements, we expect to be responsible for payments of approximately R$476 million, or 58% of the net present value of the agreements.became effective on April 1, 2023.
B. Business Overview
Market Characteristics
The telecommunications sector in Brazil is marked by stronga high degree of competition and by the effective regulation of the National Telecommunications Agency, or Anatel, whose mission is “to promotewhich has a stated purpose of “promoting the development of the country’s telecommunications in Brazil, in order to provide it
with a modern and efficient telecommunications infrastructure, capable of providing theoffering society with adequate,appropriate and diversified andservices at fair prices throughoutnationwide”.
Throughout 2022, the entire national territory.”
The mobile market has been characterizedtelecommunications sector continued to suffer the impacts brought on by the process of migration from prepaid to hybrid (Control plans) and postpaid plans. This movement can be seenglobal COVID-19 pandemic, as a resultwell as restrictions aimed at curbing the spread of the growing demand for access tovirus. However, despite these challenges, the sector maintained a growth trajectory in terms of 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 2020, the sector also reflected the tendency toward increased data consumption, requiringas such, operators were required to adapt their networks and face the challenge of delivering an increasingly robust infrastructure in an environment which requires greater rationality of investments, including on projects such as the densification of sites, frequency refarming, and the aggregation of carriers on two or three frequencies. Furthermore, we continue to advance in sharing initiatives focused on 4G and transport network, despite accelerating the rollout of our 5G coverage in order to optimize traffic offload. This network evolution has allowed for a better usage experience, both in terms of performance – with higher download and upload speeds and lower latency – as well as in indoor coverage and greater penetration.
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Demand for the evolution of technology and investments in the sector has also continued. In particular, this can be seen in relation to the 5G auction, which was held in the last quarter of 2021 and in additional to a financial component established a series of special commitments undertaken by successful bidders related to the right-of-use of frequencies, which forces the sector to undergo a new cycle of investment. The deployment of 5G technology is expected to bring about significant technological advances, enabling the generation of new business models, encouraging an increasingly connected society, and paving the way for advances in research and development.
Throughout its history, the Brazilian telecommunications sector has always been impacted by fierce competition, evidenced by the presence of aggressive marketing offers, including the add-on content offered to customers and strong price competition. However, in recent years, we have observed this competition begin to focus more rational investments. Additionally,towards quality and service. This trend continued in 2022.
During 2022, we closed the industryOi Transaction, following satisfaction of all the conditions, including regulatory consents by Anatel and CADE. However, following the closing, the Buyers, including us, initiated an arbitration proceeding relating to the adjusted closing price, after learning that there were differences in assumptions and calculation criteria, which the Buyers only had access to following the closing. The sale of the mobile operation was part of the Court-Ordered Reorganization Process of Oi S.A. – Under Judicial Reorganization.
Lastly, 2022 was marked by increased integrationthe launch of digital services into portfolios5G technology in orderBrazil, which seeks to monetize offerings.
Finally,address the growing demand for fixed broadband and the strong migrationfaster connection speeds. We ended 2022 having launched 5G technology in all 27 state capitals of Brazil, with a much higher number of antennas than required by Anatel, allowing us to higher speed service offerings (especiallyprovide an even better experience for ultra-broadband, with speeds above 34Mbps) reflected the new perception of Internet access as an essential asset for the population.our customers.
Mobile Market Developments
The following table shows the data of Brazilian mobile market during the periods presented.
As of December 31, | ||||||
2020 | 2019 | 2018 | 2022 | 2021 | 2020 | |
Brazilian wireless subscriber base (million)(1) | 234.1 | 226.7 | 229.2 | 252.0 | 254.9 | 234.1 |
Prepaid lines (million) | 114.7 | 116.8 | 129.6 | 111.9 | 118.9 | 114.7 |
Postpaid lines (million) | 119.2 | 109.8 | 99.6 | 140.1 | 136.0 | 119.2 |
Estimated total penetration (%)(2) | 97.2 | 96.9 | 109.9 | 117.6 | 103.7 | 97.2 |
(1) | Source: |
(2) | Based on information published by Anatel and IBGE/IPC Maps (December |
Differently from the dynamics perceived on previous years,The Brazilian mobile market reported a growthdecrease in subscriber base of 3.3%1.1% year-on-year (“YoY”). The total base, breaking a trend towards growth pace has been observed forfrom recent years. During 2022, postpaid users reached 140.1 million users. Since the last time in 2015, when postpaid segment began its consolidation. Duringend of 2020, postpaid net additions reached 9.6 million users (63% were human postpaid lines) and surpassed the 2.3 million drop in prepaid users for the first time in five years. With the contraction of the prepaid customer base by 1.9% over the course of 2020, itis no longer represents the market’s largest component, constituting 49%shrinking even further relative to postpaid customers in the years ended 2021 and 2022. It now constitutes only 44.4% of the total subscriber base as of December 31, 2020,2022, as compared to 52%47% as of December 31, 2019.2021. The significant reduction in the overall number of prepaid users is mainly due to the acceleration in users consolidating multiple SIM cards tointo a single one,SIM, 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 8.8%3.2% during 2020, achieving 51%2022, reaching 55.6% of the total subscriber base as of December 31, 2020,2022, as compared to 48%53% as of December 31, 2019,2021, driven by operators’ efforts to monetize their customer base, offering more data, content and digital services, and the migrationsmigration of customers from prepaid to Controlcontrol plans, and from entrance plans to postpaid.postpaid plans.
Mobile Competitors
TIM is the brand name under which we market our mobile telecommunications services, offering 5G DSS, 4G, 3G and GSM technologies. Currently, our subsidiarieswe 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%100% of the country’s population based on Anatel’s coverage criteria.Brazil’s municipalities.
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In addition to TIM, as at the end of 2022 there are threewere two other major participants in the Brazilian mobile market that offer nationwide coverage in all Anatel wireless areas: Vivo and Claro, since Oi was acquired by the trio (us, Claro and Oi.Vivo) in April 2022. See “—A. History and Development of the Company—Historical Background.”
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 affiliatedaffiliate 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 the Company 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.
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.
In recent years, in preparation of certain anticipated market events, the Brazilian telecom sector has experienced a series of broadband-centric capital markets and mergers and acquisitions activity, resulting in a mixture of organic growth and strategic acquisitions. The 3.5GHz rights that were acquired at auction by regional providers will open an opportunity for them to become mobile network operators. Additionally, the new neutral network, which is expected to be offered by Winity Telecom, using the 700 MHz frequency will be able to leverage mobile network capacity for ISPs. One of the main opportunities for ISPs in the mobile market will be for ISPs to leverage their current broadband customer base with bundle offers combining their existing broadband offering with mobile offerings that utilize the mobile neutral network.
The consequence of this has led to a growing number of strong market participants in the sector. Brazilian ISPs pursing IPOs aim to use the IPO proceeds to strengthen their regional presence across the country. In July 2021 alone, three of Brazil’s largest ISPs, Desktop, Unifique and Brisanet, staged their IPOs. Shares of the companies were listed on the B3 stock exchange in São Paulo. The wave of Brazilian ISP capital markets and mergers and acquisitions activity reinforces the companies' expansion plans, with regional providers continuing to add new acquisitions to their post-IPO portfolio by acquiring smaller ISPS to complement their existing footprint. Other groups are undertaking this same strategy, for example Grupo Vero, Grupo Conexão, Grupo EB Capital, and Grupo mhnet.
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. For a breakdown of our total revenue by category of activity, see—Item 5. Operating and Financial Review and Prospects—Results of Operations for the Year Ended December 31, 2022, compared to the Year Ended December 31, 2021.
TIM isWe believe that we are well recognized in the market for itsour strong brand, “TIM”, and for itshaving a reputation as an innovative and disruptive company capable of setting new consumption standards for the market. Our proactive approach allows the Companyus 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.
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The Company isWe are characterized by itsour 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 offerswe offer a fixed-line ultra-broadband service, TIM Live,UltraFibra (formerly TIM Live), WTTx technology through UltrafibraUltraFibra service, and is startingwe have started to offer IoT solutions, with successful examples in agribusiness.agribusiness, while also looking for new opportunities in other industrial segments such as mining, transport and logistics, healthcare, public safety and industry 4.0.
The CompanyWe also offersoffer a variety of digital content and services in itsour portfolio of packages, aimed at increasing for its clients the day-to-day functionality of theirour customers’ mobile devices. The ability to manage a complete and varied portfolio gives TIMus the possibilityopportunity to offer customized packages to itsour customers and to provide offers bundlingwhich bundle services, like voice and data, to customers in certain regions.
In 2020, TIM maintained a position as a competitive player2022, we continued our innovative and pioneering strategy in all consumer market segments (prepaid, control and postpaid). In the postpaid segment, the biggest launch of the year was the new plan with “TIM Black” tariffan Apple TV+ subscription included for no additional fee. Settled at the same price point as our other postpaid plans providing a better service usage experience and continuously innovating offerings, which have differentials like data rollover and international roaming (data package for usecompetitively positioned in the Americas). The biggest 2020market for postpaid launch wasoffers, the “new TIM Black Família”,partnership with innovative flexible bundle for streaming subscription where the
customer can choose between Netflix, HBO GO or YouTube Premium in their plan. We’ve also includedApple allows us to provide a new data package for international roaming to useunique offering in the Americas,Brazilian market. Furthermore, we started to establish our position in the 5G market. We launched an extra “5G Booster Package” to postpaid customers, enabling them to enjoy the best of our 5G capabilities. In addition, we believe we are currently the only carrier in the Brazilian market to allow our customers to choose their favorite subscription among HBO, YouTube or Netflix without the need to switch plans. This feature also permits customers to easily change their choice whenever they want. We still maintain other advantages such as “data rollover”, “concierge service” and the new “TIM in flight”, to contribute to a better customer service with new channels available for customers such as voice message in WhatsApp and the option to schedule customer service in store, and a new app experience with an online store where customers can buy premium streaming services, like a “one-stop-shop”. We also made innovations in our portfolio of control and prepaid offerings.experience. In the control segment, which tends to be a gateway to postpaid plans, we wereincreased our focus on the first to offer a new tariff plan, the TIM Social Networks Control plan (“TIM Controle Redes Sociais), with” (TIM Control Social Media) plan, which grants unlimited access to social networks, unlimited calls to any operator, plus data and digital services packages. We believe we continue to be used on Instagram, Twitter and Facebook packages, and has a valued leaderhigher average ticket. Furthermore, in the prepaid plan segment, andwe continued with our strategy to increase value added benefits for our customers. For example, by including an “Amazon Prime Mobile Only” subscription with no additional fee to TIM PRÉ TOP customers, we maintain our strong position in the prepaid market, being the only carrier in the global market to offer video and music subscriptions without an additional fee (Amazon Prime Mobile Only and Deezer Go – launched in 2021). Through this product strategy, we believe that our pioneering and innovative spirit (which we consider characteristics of our DNA) will sustain our relevance in the domestic market and complete packages, aimingallow our customers to increase loyalty among our customer base.take full advantage of growing network capabilities as we enter the 5G era.
OnIn July, 23, 2019, the Companywe and Telefônica BrasilVivo also entered into a memorandum of understanding or the Vivo MoU,(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, the Company 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, but we have been granted, on February 1, 2021, the right to acquire an indirect equity interest of approximately 1.4% in C6 Bank through the exercise of subscription bonuses, subject to certain agreed upon thresholds.
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:
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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) (“RQUAL”), or RQUAL, which following public consultation No. 29/2017, was approvedcame into force in December 2019 (Resolution No. 717/2019)March 2022. Based on performance against certain quality and performance indicators, operators will each be classified with a grade between A-E. This grading is expected to enter into forcetake place in 2022.2023. RQUAL is based on responsive regulation and 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.”
Accordingly, TIM haswe have also started tracking itsour quality and performance indicators, andin particular focusing on service quality at the city level, in order to assure an even more rigorous review of theour customer experience. Following the contribution period, TIM continueswe continue to monitor municipalities outside the Anatel threshold (“critical”) and hashave already started simulating the new performance 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 lastrecent years. As a highlight, the Company haswe have 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.
TIMOur LTE technology also demonstrated a strong performance and the inclusion of its LTE technologythe NR network 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 givendue to the strong demand by TIMour customers for this technology in 2020.technology. At the end of 2020,2022, approximately 90%94.18% of TIM’sour data traffic was carried out byover the 4G and 5G network, up by 5 p.p. whenwith an increase of 1.83% compared to the previous year.
It is also worth mentioning that theThe results of our digital transformation initiatives continue to expand and, during 2020, presented2022, demonstrated solid results. Given the impacts of the COVID-19 pandemic, societyour customers demanded even more network capacity and digital solutions. This demand meets the strategy TIM haswe have adopted for several years to seek digital evolution and the constant network development, aiming to ensure innovative solutions, quality and availability of services, offering a superior customer experience and strengthening the Company’sour positioning in the market. We believe that the digital transformation of our services must take place on several fronts, from the sale and activation of the line to post-sale and the so-called “self-caring”, meaning the digital service portals that allow customers to manage profiles and subscriptions, billing, collection, and payment.
Even in a challenging year, our digital channels’ positive results and the excellence of services offered to our customers confirm that we had made the right business decisions, made during such period were appropriate, provedemonstrated our capacity to adapt to adverse situations and reinforce our purpose of “evolving together, with courage, transforming technology into freedom”.
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 2020, we increased by 9.8% the number of digital customer interactions (an increment of 14% in Mobile App and Website interactions partially set off by a decrease of 36% in IVR interactions). Additionally, the number of individual users of the “Meu TIM” application in 2020 grew 12%, while IVR retention increased by 2.5 percentage points. Also, digital sales in the postpaid segment increased by 32% in the year ended December 31, 2020 as compared to the year ended December 31, 2019, and more than 2% in the prepaid segment, while recharging by digital means continues to become a more relevant sales channel, with a 30% increase in the year ended December 31, 2020 as compared to the year ended December 31, 2019.
We believe our ultra-broadband service is also viewed generally as a reference of quality in the sector, driven by our commitment to theensuring a positive customer experience. ThisThe service quality of our TIM LiveUltraFibra offering has demonstrated itself to be excellent, asproduced positive results, being recognized for 57 consecutive years in a row (2015 - 2020) by the fifth time2022) by the widely circulated newspaper, called “O Estado de São Paulo.”
We also seek a strong position in the high-value customer market as a content HUB by offering a variety of plans for individual and family usage, bundling voice and data packages, streaming and other content subscriptions, as well digital Value-Added Services (music, e-reading, video streaming, games), in order to provide a custom customer experience.
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 simplificationsimplification; and (v) raising the best practices of Request for Quotation instead of Direct negotiating in order to gain more savings, also increasing the so called Global Deal among the Companyus and Telecom Italia with the scope to capture more synergies and quality of the furniture’sfurniture’s by global vendors.
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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 understandsWe understand that the above statistics reflect itsour commitment to solidquality infrastructure and itsour focus on the customer experience. However, the Company recognizeswe recognize that there are some statistics and/or quality measures that use different methodologies that couldand which may present diversedifferent results from those that are mentioned above.
Open Innovation Program
TIM’sOur Open Innovation Program has the objective to establishof establishing 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, innovation hubs, academy and/or society, 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’sour business strengths and technology.
AAs a supporter of the concept of open innovation concept for fourfive years, TIM haswe have been obtaining goodpositive results from such approachapplying this concept to our business. After a unique year in 2019 for TIM’sour Open Innovation program, when the company became a space for promoting and fostering a new technological wave in Brazil, TIMwe went further in 2020 and 2021, increasing itsour involvement with startups, establishing new partnerships with innovation hubs dedicated to healthtechs and agritechs. During 2019, TIMwe 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 this occasion, 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 the last, one in São Paulo within CUBO, the most prestigious startup hub in Latin America. These TIM 5G Living Labs were 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.
In 2020, TIM,we together with the Telecom Infra Project (TIP) and the National Telecommunication Institute (Inatel) started the Open Field Program, which aims to develop innovative and sustainable solutions for the expansion of the radio access network (RAN) infrastructure, creating an adequate environment to run tests, like a living laboratory, validating and accelerating products and new functionalities of open and disaggregated technologies solutions, such as Open RAN. The program has taken place since 2021. Additionally, by the end of 2022, the execution of the Open RAN 5G SA TIP test plan for access network with the vendor was completed and the TIP internal process to obtain the Silver Badge began, which will take place duringhappen after the entire yearreview and approval of 2021.deliverables. This TIP Silver Badge demonstrate testing of a product, combination or solution for alignment with TIP-defined requirements, typically in a controlled environment. The specific tests required for a particular badge are established by TIP’s project groups and will comprise a significant subset of all tests required for deployment.
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In 2021, as part of our client platform strategy for start-ups, we actively pursued a number of fintechs, edutechs, insurtechs and healthtechs, among other verticals in an effort to transform those startups into unicorns. This was based on our client platform strategy pursuant to which we seek partnerships with digital service companies where we believe we can accelerate their growth and create new business models, client journeys and marketing approaches. As part of this strategy, we started pilot projects to foster the development of an ecosystem of solutions and partners with the aim to approve devices and applications in partnership with academies, government agencies, communities and startups. In 2022, we were also working more closely with the Cubo Itaú innovation center to promote co-creation with startups. In October 2022, TIM established a new singular hub, dedicated to 5G “HUB 5G TIM ” that was launched at Cube's space, with 5G demos by partners (FWA, VR gaming, AR for Industry 4.0, 5G notebook, necklace and 360° camera). The hub, a collaboration ecosystem, is a place for experimentation where customers, studies, large case companies, entrepreneurs, investors and public institutions, services and valid cases are connected to solutions in general, with a focus on developing an innovative environment aimed at business connections with companies that can be leveraged with 5G technology. The launch of our new positioning at CUBO with the “HUB 5G TIM” brand space took place at CUBO headquarters in São Paulo, with the participation of technology partner companies, innovation hubs and startups.
We in alliance with Inatel – Brazil’s National Institute of Telecommunications, will develop solutions regarding internet-of-things (IoT) and smart cities based on IoT Mobile solutions with applications that could improve the quality of life of citizens, development of intelligent tools and enable new processes of public administration.
In alliance with PUC/Rio - Pontifical Catholic University of Rio de Janeiro, we will develop different use cases in relation to following verticals:
(i) Health:
· | Patient monitoring, both remotely and in healthcare facilities: cost-effectiveness study of clinical outcomes among patients using the IoT solution and control groups; and |
· | Monitoring of assets, supplies and resources in health facilities: cost-benefit assessments of using the IoT solutions. |
(ii) Rural:
· | Efficient use of natural resources and materials, with an emphasis on meteorological and soil monitoring, in order to promote increased productivity as well as cost reduction; and |
· | Efficient use of machinery with an emphasis on machine performance management, with the aim of optimizing the use of equipment. |
In 2021, with the goal of redefining smart cities in Brazil and exploring the full potential of 5G, we, Enel X Brazil and Leonardo Brazil joined forces to serve smart, safe and resilient cities. The companies agreed to offer and develop joint solutions for smart cities, combining experience in energy, telecommunications, technology, and cybersecurity tailored to Brazilian municipalities.
In 2021, we became a partner of Embrapa, the main agent of innovation and research in agribusiness in Brazil and the world, in the development of a new innovation agribusiness hub called Silo, located in Juiz de Fora (MG). The hub pursues innovative solutions through the combination of entrepreneurship, research and innovation. We will provide an important role in operating the hub, enabling mobility and 5G.
In 2021, in relation to 5G, in partnership with AgTech Garage innovation hub, we launched a call for startups that want to evolve or pivot their business plans in order to utilize 5G. The call was successful, having more than 45 startups registered, with eight finalists. Those startups had the opportunity to present their pitch to us, involving solutions for fire detection, irrigation, intelligent fertilization, robotics, image monitoring, pest control, among others. Among the finalists, four startups were selected to test and evolve their minimum viable product (MVP) together with Auros Robotics, Quickium and Umgrauemeio.
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In 2021, driven by current market trends and the role of 5G enabling new business concepts, we established a partnership with Intel, which allows us to have first-hand access to Intel technology. The project focuses on offering 5G network services to benefit end consumers. The focus of the partnership is mainly on cloud gaming and the metaverse. This initiative is unprecedented in the Brazilian market, making us the first pioneer partner of Intel for cloud gaming over 5G.
In 2021, we again took part in the biggest hackathon in Latin America, Hacking.Rio. The challenges were based on the UN Sustainable Development Goals and we launched a challenge based on SDG 11 – “Sustainable Cities and Communities”, looking for products and services that can benefit mobility and help create, more modern and cleaner cities with green spaces.
In 2021, Stellantis, we and Accenture teamed up to launch the first standalone 5G pilot for the automotive industry in Brazil applied through a private network, which uses artificial intelligence and cloud computing.
In 2021, we were chosen as the telecommunications provider responsible for providing the 5G infrastructure and network, deploying the 5G SA (standalone) network core in the public cloud, constituting an integrated digital environment.
In 2022, after undertaking a proof of concept, we signed a private 5G network customer service partnership with a customer operating in the port segment. Pursuant to the joint initiative, we plan to implement the first 5G private mobile internet network tailored for port operators throughout Latin America. The network is expected to be commissioned in 2023, after releasing the 3.5 Ghz frequency for the city, under the oversight of Anatel, the national regulator.
The year 2022 was marked by several challenges, such as the reopening of face-to-face events, new opportunities in our partnerships, and bringing together startups that are in the scale up phase.
We participated in Scibiz, the largest conference bringing together the connection between science and business in Latin America, promoted by USP, at the International Diffusion Center (CDI) and at InovaUSP, in São Paulo. Together with several of our internal teams, such as human resources, IT/network and marketing, we held lectures on various topics and participated in panels on 5G technology, with the participation of a number of our directors, and a panel dedicated to our Cloud journey, which included participation by representatives from some of the largest tech companies.
We again took part in the biggest hackathon in Latin America, Hacking.Rio. Challenges were based on the UN Sustainable Development Goals and we launched a challenge based on SDG 12 – “sustainable production and consumption”, looking for products and services that can benefit the 4.0 industry, Big Data and 5G.
We made the first call for startups for our hub, called “HUB 5G TIM”, leveraging our new collaboration space. The first cycle was dedicated to our B2B - Corporate Solutions department, aimed at approaching startups dedicated to 5G applications for one of the most significant economic sectors of the Brazilian economy: Agribusiness. Eight startup proposals were selected, four of which were pure agritechs and four deeptechs/datatechs, with specialized solutions such as mapping the spatial variability of agricultural soils and creating high-precision management zones, in addition to computer vision, artificial intelligence and machine learning technologies. The selected startups will be able to test their solutions on one of our B2B agribusiness clients, in addition to having support from our technology department for better use of the 5G network.
Based on our open innovation model, in 2022 we contracted with 15 startups with solutions to increase revenue, improve experience and reduce cost or risk, supported by technologies such as artificial intelligence, cyber security and process automation, to meet challenges in the areas of sales, purchasing, logistics, security, legal and customer relationship. As a result, we have already observed cost reductions with legal operational processes, based on the digitization of the demand handling flow stage, significant reduction of the SLA for carrying out tasks in the IT operations area and other improvement according to the perception of our employees, among other gains.
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A Strong brand.
We believe that our brand, TIM, since the commencement of our operations, has been recognized for leading important developments in the Brazilian telecommunications market and, consistent with a new tagline.
During the 2020 COVID-19 pandemic, telecommunications services were very important, as connectivity allowed peopleour brand identity, we continue to find new waysposition ourselves at forefront of studying, working and finding entertainment, making the world even more digital. TIM translated this trend into its newsociety’s digital transformation. Our brand tagline “Imagine the possibilities”, which invites our customers to seeview the future in a positive waylight and shows that TIM will be nextdemonstrates our commitment to being along side them in theiras they face new challenges, opening up a world of opportunities. In addition, TIMwe presented a new spokesperson representing theour current brand values - freedom, respect and courage - and highlighting diversity, a relevantan important pillar in the company’sour strategy. To reinforce itsour brand strategy, TIM made a new reading of itswe revised our written purpose: “Evolve together with courage, transforming technology into freedom”, indicating that the companywe will continue to lead important market movements and act as a pioneer in customer services. Furthermore, to reinforce the positioning of our brand image,as a new campaign was launchedbrand that values our customers and brings advantages beyond just gigabytes of data, we have become the first operator to communicate TIM network quality, “TIM network. You can count on.”, that showsoffer consumers prepaid video streaming, further broadening and democratizing access to this type of service to a previously unserved customer base. Since 2015, we have been the evolution ofleader in 4G technologies, in which TIM has the largest coverage throughout Brazil, even connecting Brazil’s countryside to help facilitate technological innovation in the country since 2015,agribusiness sector. Furthermore, we pioneered the activation of 5G networks in addition to highlightingBrazil, with our first tests carried out in 2019, and we demonstrated our preparedness for the 4.5G and the newnext generation of mobile networks by launching 5G DSS. Finally, after 13 years, TIM again won the TOP OF MIND award from “Folha de SP”, onein all Brazilian state capitals while staying ahead of the main andcompetition in terms of coverage (including by focusing our 5G deployment in key regions in order to reap the benefits of our investment in 5G most respected and credible media companiesefficiently). Finally, in Brazil. In a customer survey,order to help reinforce our brand was electedassociation with music, in 2022 we resumed our music sponsorship. This included the most remembered in the telecom segment, demonstrating the consistencysponsorship of the brand2022 Brazilian edition of the Rock in Rio festival and communication work doneTIM Music Rio (free concerts on the beaches of Rio de Janeiro), TIM Music Noites Cariocas (the most iconic event in the last year.Rio) and TIM Music Mulheres Positivas (an all-female lineup).
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’sour 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 haswe also joined the Telecom Infra Project or TIP,(“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,(“NFV”), 4G RAN sharing, NB-IoT, Defense Wavelength Division Multiplexing, transport network and power saving features and solutions. In 2019, TIMwe launched itsour nationwide 4G NB-IoT network in 700MHz, covering over 3,200 cities. In 2020, TIMwe ran laboratory tests and live trials with 4G advanced features combined with 5G (multiple antennas plus carrier aggregation and dynamic spectrum sharing). The first 5G NSA compatible devices were homologated and commercialized in 2020, allowing the users to make use of the technology in the available live clusters. Open-RAN solutions were also evaluated in laboratory environment with the objective to assess the maturity of 4G and 5G disaggregated solutions for future field trials. Other advanced technologies, such as edge computing, disaggregated transponders and transport network optimization and automation solutions were also evaluated in TIM Lab in 2020.
We evaluated 5G standalone architecture and solutions in 2021 (known as 5G SA), for commercial deployment in 2022. Also in 2021, we developed proofs of concept (PoCs) making use of different technologies associated with 5G SA, such as artificial intelligence for the automated processing of images (using 5G as mean of connectivity), and cloud software for hosting 5G core network elements.
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In 2022, we continued to undertake tests for our standalone 5G architecture at TIM Lab, aiming to ensure the evolution of the 5G architecture and the provision of quality services. Another focus of our work throughout 2022 at TIM Lab were the tests of broadband/fixed network expansion scenarios and Multi InfraCo's scenarios (together with VTAL), with a focus on the interoperability tests of TIM CPEs in the InfraCo's network, in addition to the various support and testing fronts with I-Systems.
In 2022, aspiring to broaden its project horizons and position itself as an innovative brand, TIM Lab undertook to migrate to a new location, with a fully renovated test environment that would also function as an innovate space for presenting projects to potential new business partners and clients while also generating cost efficiency, with the use of its own building and with new technical features. In October 2022, we started the plan to migrate TIM Lab to a new location in São Cristovão, in the state of Rio de Janeiro, with an area of approximately 850 m2. With this new infrastructure, the TIM Lab will benefit from an increased usable area, better connectivity and greater capacity to absorb innovative projects, in addition to connections with cloud environments.
Strong commitment with ESG pillars and the only Brazilian telecommunications company listed on the Novo Mercado for over 10 years
Since TIM Participações’s listing on the Novo Mercado in July 2011, we arehave been part of the only company in the Brazilian telecommunications sector listed on thisNovo Mercado segment of the B3. As part of our listing on the Novo Mercado,B3 stock exchange, meaning that we are requiredsubject to complyB3's highest standard of corporate governance requirements, which includes compliance with heightened requirements relatingnot only related to corporate governance, andbut also to 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(the “Telecom Italia Group,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 2020,December 2022, we were listed for the thirteenthfifteenth 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, and was selected asresponsibility. In 2022, we also remained one of the “top 10” companies on the launchconstituents of the S&P B3 Brazil ESG Index in September.Index. In January 2021, TIM was2023, we were selected to joinremain in the portfolio of the Carbon Efficient Index, or ICO2, of the B3, with the commitment to measure, disclose and monitor itsour greenhouse gases, or GHG, emissions.emissions, and we were selected to be part of B3’s Great Place to Work Index, or IGPTW, once we became a GPTW certified company in 2022, recognizing us an employer that creates an outstanding employee experience. We increased, by 4%, our S&P ESG Score, which is based on our response to the Corporate Sustainability Assessment (CSA). The constant pursuit of best environmental, social and governance practices also ensures our presence in several international indexes and ratings, such as FTSE4GOOD Emerging Markets, FTSE4GOOD Latin America, MSCI AWCI ESG Leaders, MSCI Emerging Markets ESG Leaders, Refinitiv D&I Index, among others.
In 2021, we became the first Brazilian operator to integrate the Refinitiv Diversity & Inclusion Index, occupying the first position globally in the telecom sector. The index measures the performance of more than 11,000 companies - equivalent to 80% of the global market - based on diversity, inclusion and career development initiatives. In 2022, we were ranked 10th in the global ranking, maintaining our leadership in the telecom sector and in Brazil. At the beginning of 2022, we remained for the second consecutive year in Bloomberg's Gender Equality Index, which gathers 485 companies from 45 countries, with only 17 from Brazil.
As a signatory to the Global Compact since 2008 TIM participates in the Human Rights Working Group organized by the Brazilian Network of the Global Compactand UN Women since 2015 and promotes2021, we promote projects related to the Sustainable Development Goals (“SDG”). We and recognize the rights to data privacy, safe internet, access to information and freedom of expression as essential and unnegotiable.unnegotiable as part of our efforts to respect Human Rights.
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As part of itsour commitment to society in addressing climate change, TIM conductswe conduct periodic mapping of the sources of emissions in itsour activities. The Company isWe are 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). and also by working with TIM in Italy to establish goals aligned with the Science Based Targets Initiative (SBTi), since the companies controlled or related to the TIM Group in Italy (“TIM Group”) joined the initiative in July 2021 with the challenge of keeping global warming limited to 1.5°C, as established in the Paris Agreement. The SBTi aims to promote the best reduction and offsetting GHG emissions in line with climate science. Since 2010, TIM reports itswe have reported our greenhouse gases (GHG) emissions by means of the Carbon Disclosure Project (“CDP”) – the largest database of primary corporate climate change information in the world – and publishes its GHG emissions inventory in accordance with the Brazil GHG Protocol Program. In 2021, the CDP questionnaire was integrated by B3 as a crucial part of the methodology for the selection of the constituents of the Corporate Sustainability Index and our CDP Score improved from B- to B. In 2022, we remained in the ICDPR70, an index we have been part of since its creation in 2021, which focuses on including companies publicly committed to reducing their carbon footprint, based on the companies' scores in the CDP questionnaire and ranking those with the best level of awareness about climate change.
Since May 2022, we have publicly declared our support for the recommendations by the Task Force on Climate related Financial Disclosures (TCFD), demonstrating our commitment to better information as a basis for understanding climate risks in our transition to a low carbon economy. We have also aligned our approach to climate risks and opportunities with the TCFD recommendations and published these in an issue brief.
We also identify opportunities to improve our levels of excellence in our Environmental Management System (EMS), covering all our operations, based on our Environmental Policy. This includes basic commitments such as protecting the environment, customer service to the legal requirements and norms of the organization and the continuous improvement of performance in processes and controls, having obtained the ISO14001 environmental certification for Network Management and Operation in the states of Rio de Janeiro, São Paulo and Espírito Santo.
For 1215 years TIM haswe have published itsour Sustainability Report presenting the main financial and non-financial results, in accordance with the Global Reporting Initiative (“GRI”) Standards methodology. TheSince 2021, we refer to this publication as the ESG Report and reinforce our commitment to transparency and accountability to our stakeholders, organizing the report into three pillars: Environmental, Social and Governance. Since 2021, the ESG Report also reports the SASB - Sustainability Accounting Standards Board - indicators. Our ESG Report has an independent third-party limited assurance.assurance since 2009.
Our main policies - such as the Corporate Social Responsibility, Human Rights, Environmental, Climate Change, Supplier Relations, Risk Management, Anti-corruption and Safety & Occupational Health Policies - are publicly available to the consultation of our stakeholders.
The company also identifies opportunities of improvement to achieve levels of excellence in its Environmental Management System (EMS). It has been working on improving performance in processes and controls since 2010, having obtained ISO 14001 environmental certification for Network Management and Operation in the states of Rio de Janeiro, São Paulo and Espírito Santo.
Founded in 2013, Instituto TIM has a mission to democratize access to science, technology and innovation, in order to promote human development in Brazil. More than 700,000 people from all Brazilian states and the Federal District have been benefited by the education and inclusion projects of Instituto TIM, some of which were internationally awarded (i.e. Governarte Awards – BID 2015). More on Instituto TIM’s actions on the website https://institutotim.org.br/.
In 2020, TIM included2022, we updated our long-term ESG commitments in its 2020-2022our 2023-2025 Strategic Plan. The CompanyBased on the ambitions assumed in our last Industrial Plan (2023-2025), we included new objectives related to a portfolio of initiatives that are part of our business strategy, contributing to a coherent interrelated structure between ESG aspects, business operations and organizational accountability. For the TIM Group, the business role is increasingly tied to the responsible management of aspects that go beyond financial targets and aim to generate positive value for society in the long term.
Among the established goals, which are also part of MBO and LTI compensation programs, our environmental pillar is to become a carbon-neutral company by 2030 and net-zero carbon by 2040. In addition, we have undertaken to maintain a policy of using renewable sources for 100% of our energy consumption, to increase by 110% the energy efficiency in data traffic (against the base year of 2019) by 2025, to reduce by 47% scope 3 indirect emissions by 2030 and to recycle at least 95% of our solid waste by 2023. From a social perspective, the main commitments are for our workforce to be comprised of 40% of black people, our leadership positions to be comprised 35% of women, to take 4G connectivity to all Brazilian cities, and to keep our level of employee engagement of at least 80% until 2023. We have obtained the ISO 37001 (anti-bribery management systems) and, aims to obtain, untilin 2022, also obtained the ISO 27001 (information security management), both are important aspects of our Corporate Governance pillar, while reducing GHG emissionswhich also has as goals to recertificate them when needed, and improving eco-efficiency are relevant Environmental goals. Onby 2023, to keep TIM on the Social pillar, the trainingNovo Mercado, Pró-Ética and ISE-B3, and the engagement of employees are the main objectives.ISO 14001 and ISO 9001 certifications. Our ESG plan is annually updated together with strategic plan.
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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 optionsshare based incentives 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, and solid earnings before financial revenues (expenses) (including foreign exchange variations), income tax and social contribution, depreciation and amortization or EBITDA,costs and expenses and share of loss of an associate (“Adjusted EBITDA”), according to our internal analysis, we believe that we have a strong cash flow generation, a solid financial position and a low relative debtNet Debt to Adjusted 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 Strategic Plan
We expect our updated strategic plan to allow us to consolidate the TIM brand through 2023,2025, in a consistent approach with our prior plan (2020-2022)(2022-2024). Our new plan is still focused on our main stakeholders and on providing building blocks for our future growth by combining evolution and transformation to developreach our aspirations, which combines our bold expectations for both value and growth. The improvement in overall business dynamics, driven by the combination of having a larger revenue base with a solid margin recovery trend and better capital expenditure efficiency provides us with opportunity and a clear path to optimizing our spending. This dynamic is expected to provide benefits to our cash flow and overall financial returns.
The means by which we achieve our aspirations pass through (a) being recognized as the best mobile operator in Brazil, (b) accelerating our growth by pursuing a new asset light model in broadband, (c) scaling-up our presence in the B2B/IoT tech arena and (d) expanding the portfolio of our strategic pillars.partnerships to accelerate our ability to capture value.
In order to be recognized as the best mobile operator in Brazil, we know we have to surpass our competitors by providing the market with (1) the best offer, using innovation as a core differentiator, (2) the best customer service, which involves a long journey towards developing a culture of customer experience excellence, and (3) the best connection, by taking the lead in the network quality race, all whilst evolving to provide our customers the best overall service and experience available in the market.
For the purposes of accelerating our growth through a new asset light model in broadband, we are focused on the massive FTTC to FTTH customer migration (to maximize customer experience and profitability), accelerating the expansion of our footprint through partnerships like I-Systems, and enhancing our value proposition, launching convergence play (mobile + broadband) with a better trade-off between volume and value.
In order to scale-up our presence in the B2B/IoT tech arena, we have been undertaking strategic movements, aiming to capture the expected growth of the market by increasing adoption across verticals and 5G opportunities, through (a) the select use cases verticals, (b) partnering with industry leaders, (c) developing solutions in specific ecosystems, whilst having in mind that the market for solutions and services related to connected applications will grow faster than the market for connectivity. We have already been partnering with many industry leaders and are evaluating a number of promising vertical opportunities that we wish to pursue. There are many sectors which present business opportunities for us to offer a full vertical solution.
We are strengthening our core business to generate cash-flow to sustain new avenues of growth and increase shareholder remuneration. We believe that duringthis unique combination of elements, with ESG agenda embedded in our business strategy, will result in the nextbest value proposition for the investor community.
In an effort to generate high value beyond our core business through partnerships with potential market disruptors and unicorn candidates, our plan is to leverage our base and key assets to target organizations that we believe can grow exponentially, boosting our unique assets through a symbiotic relationship. We have developed a clear plan of action to generate value for our customers, partners and shareholders, whilst retaining our customer base with an ever improving service quality and value proposition. In recent years, some relevant trends, such as mobile market consolidation, wavewe have built an unrivalled, efficient and scalable machine to convert millions of asset separation, acceleration incustomers to new digital consumption, 5G, such as the Internet of things, or IoT, and the machine-to-machine market, or M2M, technology, will have structural implications on the business model of telecommunication operators in Brazil, including the uncertain pace of the country’s economic recovery. Our aspirations for 2023 reflect these market opportunities and trends, as we will strive to:services.
Our forward-looking strategy is focused on the four strategic fronts:
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In our view, the COVID-19 pandemic increased demand for connectivity and the telecommunications sector has taken advantage of it. As a result, we believe we can be considered a more resilient company, not only due to data consumption growth, but because we have been honing our market vision and execution capacity to create long-term value.
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.
TheUp until 2020, the Brazilian mobile telecommunications market iswas facing an overall reduction in the number of prepaid customers, as userscustomers. However, in 2021, the prepaid base increased, which previously held multiple SIM cards are consolidating to one single SIM card,may be a consequence of the reductionsocio-economic changes in population or particular incentives in our competitors’ offerings. In 2022 the market underwent a series of interconnection charges, which allow companies to offer plans with off-network calls at the same pricedisconnections of on-network calls. In connection with this trend,inactive lines that were inherited by leading carriers following their acquisition of Oi’s mobile business. We maintained 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 andwhile 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 also implemented new offers, new handset strategy and initiatives in our sales channel model because of the pandemic. We improved the digital channel and created a drive thru and delivery sales models experience while physical stores were closed to maintain sales.
The COVID-19 pandemic crisis led to a drop in prepaid recharge revenue in the first months of the pandemic, recovering in the second half of the year. In order to contain the negative impact of the crisis, numerous actions were taken, highlighting the encouragement to recharge by means of digital channels and the digitalization of Control customers who paid their bills in physical channels, reducing bad debt.
experience. 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.
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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 productsproduct s 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 more than just a connectivity provider, offering a platform (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 strategyProviding affordable Internet access.
Mobile network technology has been successful in part duecreated a business opportunity for CSPs to the limited service offerings of other long distance carriers in Braziloffer more affordable connectivity services to individuals, which brings benefits for both customers and the acceleration of fixed-mobile substitution.mobile operator. 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.
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.). We believe that our telecommunications activities generate positive impact beyond our business. Access to mobile telephony and broadband internet services allows not only communication, but also creates countless opportunities for people and companies, functioning as a powerful tool for innovation. This transformation also enables digital inclusion through the provision of connectivity to regions otherwise without access to these resources, such as isolated communities, rural locations and low-income areas. 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 entry level 5G smartphone models that providewill be ready for the deployment of our 5G network, providing quality Internet access at a low cost.access. This approach has allowedis allowing 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.5G. 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 3G4G and 4G5G networks by providing for suitable and affordable postpaid and prepaid Internet plans.
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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, TIM Participações acquired Intelig (now known as TIM S.A.) in December 2009, in order to establish TIM’s own fiber optic network and develop automation projects. TIM Participações 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 the Company in 2018) in 2011 to strengthen and expand our fiber optic network.
With the acquisition of Oi’s mobile operations, TIM will improve itsOi Transaction, we have improved our market position, capturing higher gainsbetter economies of scale, synergies and optimizing investments. TIM should incorporateWith the acquisition, we have incorporated into our network approximately 7,200 mobile access sites, which corresponds tobeing approximately 49% of the former Oi’s total mobile assets. We intend to maintain 2,500 of these mobile access sites, of Oi’s mobile assets unit.improving coverage and user experience, while decommissioning the remaining sites as they are too close to our existing sites.
Besides improving our core infrastructure, TIM haswe have been rolling out an aggressive plan for 4G coverage, which we believe has placed TIMus as the undisputed leader infor 4G coverage in Brazil, achieving more than 3,477 cities withproviding 4G technology in 2020, considerably ahead100% of its competitors. This positions TIM as havingBrazilian cities at the best coverage and the best mobile broadband technology, creating the possibilityend of an improved market position, particularly for high-end customers. TIM has also reinforced its2022 – in line with our commitment to cover 100% of the country with itsour 4G network by 2023. Moreover,the end of 2023, considerably ahead of our competitors and we believe positioning our brand as the market leader in terms of coverage. We were elected the telco with the best “Core Consistent Quality” and with the higher network availability by OpenSignal, in partnership with Anatel.
Strengthening our expanding core and developing our recent new businesses.
We have continued our plan to strengthen and expand our core sectors. TIM has also been strategically investing in 3G technology, achieving more than 3,200 cities covered in 2020. In order to improve our network coverage in an efficient way, without raising investment levels, TIM has executed network sharing agreements during 2020 with other telecommunications providers.
Expansion into new businesses and continued strength in recently expanded sectors.
TIM LiveUltraFibra offers high quality ultra-broadband, with high-speed data connection, currentlyconnection. To navigate our way through new markets, we, through partnership with I-Systems and others, have accelerated our footprint expansion, FTTH (fiber to the home) network coverage and continued to grow, prioritizing the consolidation of already active clusters. We ended 2022 with growth of 30% YoY of total homes passed (HPs) with fiber, operating in 34 localities with FTTH (+47.8% YoY), being 2732 cities and plus 79 administrative regions of the Federal District. We ended 2020 surpassing 3.2 million homes-passed (HPs)District, and with FTTH (fiber to the home) technology – an expressive double-digit growth of almost 43%ARPU increasing by 1.7% when compared to the fourth quarter of 2019 to the fourth quarter of 2020 – and an ARPU increase by 7.8% when compared2021.
TIM UltraFibra ended 2022 with 2019.
In 2020, we had a base of 645 thousand clients,716,000 connections, adding about 80 thousand customers in the twelve past months (up 14.0% YoY). Net additions to FTTH reached 131 thousand new usersapproximately 31,000 lines in the past twelve months. .12 months, increasing by 4.5% YoY, maintaining its growth trajectory, with the FTTH base as the main lever. Higher value plans, with speed above 100 Mpbs, continue to gain more relevance, reaching a 77% share of the total base in the quarter ended December 31, 2022. We plan to continue expanding TIM Live'sUltrafibra's services with the right balance between Salescoverage rollout model transition from building to renting, with I-Systems acting as one of the infrastructure vehicles with the mission of deploying, operating and Capex, reinforcing clusters already launched and accelerating our deploymentmaintaining last-mile infrastructure for broadband access, in a strategy of fiber (backbone, backhaul and fiber-to-the-home)changing capital expenditure to operating expenditure with fiber-to-the-home offered in selected regions. Our success withpositive free cash flow impact.
Since 2020, TIM Live has been developing an innovative customer platform strategy that aims to monetize our customer base. Strategic partnerships, together with Mobile Advertising, yielded revenues of approximately R$185 million in 2022.
Following the same approach, in May 2022, we announced a new strategic partnership, this time focused on the digital security market and entertainment. This partnership was born between TIM and the FS group with the creation of EXA, a new brand dedicated to digital solutions for end consumers. EXA began to offer reading solutions to our customers directly in their plans through the Ayabook and Aya Minibooks applications (which provide access to digital books) and through Bancah (which provides access to several Brazilian newspapers and magazines). As a result, of the strategy of offering a differentiated autonomous broadband service, with an OTT friendly approach.more than 40 million TIM customers can benefit from these services.
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Sales and Marketing Strategy
Our recent sales and marketing strategy has been characterized by:
· | 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 |
· | 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; |
· | 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; |
· | an effort to maintain our position as an innovator by relaunching TIM Black Família, as the first mobile plan in Brazil with flexible bundle for streaming subscription where the customer can choose between Netflix, HBO GO or YouTube Premium in their plan. 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 data package for use in the American continent, 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. In addition, the TIM Black portfolio has benefits like data rollover and international roaming (data package for use in the American continent); |
· | 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; |
· | 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 |
· | at the end of 2021, we changed our organizational structure to bring together under a single team all areas related to the strategy and development of digital sales operations, including ecommerce and other remote channels such as omnichannel, marketplace, live commerce and telesales, in the consumer and small and medium-sized companies segments. The new team will be responsible for strengthening and boosting the development and management of this sales channel. |
Digitalization and innovation by means of a partnership with C6 Bank, a digital bank, that adds more value to postpaid customers, bringing exclusive benefits such as credit card with free annual fees, exclusive investment portfolio, no tax to open an account, subscription of a premium delivery app included “RappiPrime”, and also expanding our telecom benefits with internet bonuses, internet to use in international roaming, international long distance calls and the possibility to buy smartphones with better payment options with C6 Bank credit cards.
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We are negotiating a new partnership with an educational group in Brazil to offer greater value and exclusive benefits to our customer base and expand access to digital education services.
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.
Our postpaid plans include the following charges:
· | monthly subscription charges, which usually include a bundle of minutes, data and digital contents, that are included in the monthly service charge; |
· | usage charges, for usage in excess of the specified number of minutes included in the monthly subscription charge; and |
· | additional charges, including charges for Value-Added Services and data services. |
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.online. Customers can also recharge straight from their mobile handsets using credit cards.
Consumer Plans
In 2020,2022, 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.
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Within the consumer business, our main plans include:
Prepaid Plans
· TIM Pré TOP: Offerings launched during 2020 were built for provide a full experience with simplicity, by adapting consumption according to balance and recharge; boosting benefits (unlimited network calls, unlimited calls for other carries using code 41, adaptable data packages and SMS). In addition, due to the more aggressive competition scenario, we have become more competitive, giving more benefits to customers with a high recharge value and expanding the monthly R$20,00 offer to more area codes.
· TIM Beta: With an exclusive feel, this plan focused on young and digital customers that can only enter by invitation send by existing members or participating in a journey and accomplishing tasks to conquer their own invite. Until the end of 2020, the plan offered voice, SMS and data packages per day, week or month. However, in December, there were changes in the plan with the end of the commercialization of daily and weekly offers. New monthly offers were launched with more attractive service packages that include 8GB of internet franchise for Netflix, YouTube, Instagram and TikTok and unlimited calls.
· | TIM Pré TOP: Offerings launched during 2020 were built to provide a full experience with simplicity, by adapting consumption according to balance and recharge; boosting benefits (unlimited network calls, unlimited calls for other carries using code 41, adaptable data packages and SMS). |
· | TIM Beta: With an exclusive feel, this plan focused on young and digital customers that can only enter by invitation send by existing members or participating in a journey and accomplishing tasks to conquer their own invite. Currently, TIM Beta is only offered as a monthly subscription that includes Deezer Premium and exclusive data packages for YouTube, Netflix, TikTok and Instagram. |
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 and TIM Black plans, discussed above, improving our portfolio by offering large shared data packages with monthly video streaming subscriptions, such as Netflix, HBO GO or YouTube Premium already included in the fee.
TIM Black Família plans start at R$199.99184.99 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, Instagram and others. The main offer is set at R$319.99284.99 (for one main line and three dependents) with unlimited off-network calls, 100 GB shared data package, Netflix, HBO GO or YouTube Premium monthly fee included, and unlimited data for OTT applications such as WhatsApp, Facebook, Instagram, data rollover, international roaming (including data package for use in the American continent, seven days of unlimited WhatsApp and 30 minutes of voice) and others.
TIM Black plans start at R$109.9999.99 for an entry level plan with unlimited off-network calls, 15 GB data package (for one main line), and unlimited data for OTT applications, such as WhatsApp, Facebook, Instagram and others. The main offer is set at R$149,99139.99 (for one main line) with unlimited off-network calls, 25 GB data package, data rollover and international roaming (data package for use in the American continent) and other benefits like unlimited data for OTT applications and Value-Added Services such as music, e-books and magazines.
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 planplan; 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$44.9946.99 with unlimited on-network calls and 25 minutes of off-network local calls and 2.515 GB Internet. The main offer in the TIM Controle portfolio (which has a commercial focus) is set at R$64.9959.99 with unlimited calls, 4.0 GB19GB Internet and unlimited data for OTT applications.
Corporate Plans
We are seekingcommenced an ambitious endeavor in 2018 to increase customer base loyalty withinbridge the Controle segment by offering discounts forconnectivity gap in Brazilian rural areas in partnership with the agricultural industry. As a 12-month contract; this typeleader in 4G coverage, we already had agribusiness customers, but sought to enable the digitalization of the industry and to 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 callssolutions in order to encourage customersincrease our productivity with automation, control and new technologies. We joined major companies within the sector to upgrade aftercreate ConectarAGRO, a customer-focused initiative to expand connectivity to all rural areas of Brazil, increasing productivity and transforming the trylives of those who live in these regions. The initiative reached its 2019 goal of 5 million connected hectares and buy period.expects to progress further in 2023.
Corporate Plans
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In 2020,2021, 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 commencedIn 2022, we started offering private networks combined with edge computing solutions in the B2B market, in order to address the needs of agricamps, and ports and other verticals to have access to high-throughput, low-latency and high resilience 5G networks, ensuring that companies always have access to the bandwidth and network resources they need, including low latency time. We intend to implement those networks in 2023.
We maintain a prominent position in the area of Internet of Things (known as IoT), especially in the AGRO segment, where since 2018 we have started an ambitious endeavor in 2018effort to bridgefill the connectivity gap in Brazilianthroughout rural areasBrazil in partnership with the agricultural industry. As a leadersector. In 2020, in 4G coverage, TIM already had agribusiness customers,addition to consolidating its leadership in AGRO, we managed to evolve with projects in other verticals with action and cooperation with the ecosystem. Our strategy that has connectivity as the central point, our strongest attribute, but sought to enable the digitalization of the industry and to offer innovativewith complete solutions together with our partners in order to give more value to our customers and, at the same time, generate more revenue and loyalty. In addition, we have been developing a new network product and service model by offering private networks using 4G and 5G mobile network technologies for corporate customers, mainly for industrial segments such as mining, transport and logistics, healthcare, public safety and industry 4.0.
Since 2018, in an ambitious effort to fill the connectivity gap in rural Brazil, we have increasingly advanced in enabling digitization of the sector and allowing the adoption of innovative solutions to increase its productivity and efficiency with automation, control and new technologies.
We joinedare a founding member of ConectarAGRO in partnership with the major companies withinplayers of the agricultural sector, to create ConectarAGRO, a customer-focused initiativefocusing on customer-farmers, to expand connectivity to all rural areas ofin Brazil, increasing productivity and transforming the lives of those who live in these regions.
In 2022 we reinforced our position of prominence in the area of Internet of Things (known as IoT), not only due to strong results in agribusiness, but with relevant projects in other verticals such as logistics, public safety and mining, acting and cooperating with the ecosystem. We also established ourselves in the 5G private network business segment and closed a number of deals in industrial sectors, the most significant of which was the first 5G port operation in Latin America, located in Port of Santos, State of São Paulo. The initiative has reached its 2019 goalcenter point of 5 million connected hectaresour strategy is connectivity, complemented by fulsome solutions together with our partners to deliver additional value to our customers while generating more revenue and expectscustomer loyalty.
In the ICT and Mobile market, our strategy is to progress furtherreinforce our portfolio of traditional solutions and our positioning as a significant player in 2020.large companies’ segment, offering various corporate solutions for mobile or fixed services (voice and data). In addition, we are working to evolve our value-added solutions, seeking to provide a more fulsome approach to meet the broader needs of our premium customers.
Value-Added Services
We are constantly seeking to increase value to our customers through innovative offers and products, and 20202022 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
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In 2022, we launched what we consider to be the most relevant change regarding Value-Added Servicesinnovative offer in 2020 wasthe Brazilian pre-paid space, made possible by partnering with Amazon. Pursuant to our offer, all pre-paid customer are granted free access to Amazon Prime Video. This has generated a spending increase of 20% for our pre-paid base using the service.
We also continue the improvement of our portfolio through additional services provided by new strategic partners. For 2021, 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.
Financial and Other ServicesDigital Channels
In 2020,2022, we continued to develop this businessour digital channels 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, suchmarket. We launched new digital customer service channels, which aims to maximize convenience for our customers. We continue to use a new tool called DialMyApp that shows a visual interactive voice response (known as TIM Protect,IVR) on the customer's cell phone every time the customer calls the contact center from an Android device. This is intended to enable our customers to resolve their issues directly on their smartphone without needing to go through the traditional phone service. We achieved first place in customer engagement on this platform among all Brazilian telcos. We also continue to use customer service through RCS, a value added services insurance planGoogle platform that covers certain device damages, lossesallows easy interaction with our customers, with user-friendly visual elements, in addition to a more interesting cost composition. Once again, we were the first telco to launch this service in Brazil. We also started the process of internalizing pre- and theft. For 2021, we intendpost-paid migrations under the leadership of the board dedicated exclusively to develop new partnerships with Brazilian fintechsdigital and remote channels created in order to provide agility and innovation to our customers.
Digital Channels2021.
In 2020, we focused2023, our efforts infundamental pillars are to increase the share of proprietary channels, with the evolution of digital channels (including publicthe e-commerce internalization process and logged web sites, self-caring applications and e-commerce portals) in order to deliver new services, provide betterredevelop the MEU TIM app, as a strategy to improve customer experience,
increase the volume of users and operate with more efficiency. Digital channels usage volume has increased significantly in 2020, with more visits in the public website and increases in the total sales and users of the Meu TIM application as compared to 2019.
In addition, we are able to interact with our customers through WhatsApp, a channel that is already integrated intoimprove 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.journey.
Customer Service
In order to serve our customer base, almost 5563 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 18 customer care centers, two of our own and eight16 outsourced, comprising around 10,51113,511 customer service representatives and our home based service “Projeto Nova Era – 100% Remote service”, (of which 1,888 are the purpose of offering dedicated1,521 customer service representatives aim to provide the best options in terms of offers and services tooffer our multi-customer base)customers a differentiated journey). Our high value customer service, core processes and core or critical processes“Referral Channels” are maintained withinin our internal customer care centers.home based model.
As of December 31, 2020,2022, we had more than 11.8 thousand12,800 points of salessale through premium shops and dealers (exclusive or multi-brand) and consolidated partnerships with large retail chains. This figure includes 161158 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 thousand212,000 points of sale throughout Brazil.
After its launch in December 2021, we opened our first five concept stores, using a new format, launching the beginning of a new experience in our customer journey. For 2023, we plan to open four additional concept stores in this new format. The new format has several spaces where customers are able to try out smartphones and accessories that already have 5G technology, as well as equipment for connecting homes using TIM UltraFibra fixed ultra-broadband. Customers themselves will be able to carry out basic activities, such as consulting with our sales representatives, printing, paying invoices, purchasing plans and services, and even discussing with our tech experts tips for operating their devices, apps, and more. For the corporate market, TIM haswe have more than 536397 third-party business partners and 112101 employees focused on serving small-small and medium-size companies and a direct sales force team of 86 employees focused on large companies.
ThroughoutSince 2020, digital channels have been an important aspect of our customer service, was digital customer service such as ourthrough the MEU TIM mobile application Meu TIM and the Company’s website. The digitalMEU TIM web portal. Digital channels are also gaining relevance inuseful for self-service, prepaid customer self-caring, top up of prepaid customersrecharge and upselling of services.service upselling. In addition to being a better customer experience due to the quickspeed of response it provides, digital channels also allow TIMus to reduce costs such as customer service operations and sales commissions.
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We continued to roll out new features across our digital channels, increasing our ability to promptly resolve challenging issues that arise for our customers.
We expanded our customer service offerings for our digital customers by adding the following channels for our customers to connect with us: CHAT MEU TIM (Web and App), WhatsApp, SMS, RCS, Telegram, Apple Message for Business and Google Business Message.
We also talk to our customers via Twitter, Facebook and Instagram. As of December 31, 2022, our principal Twitter account had more than 740,000 followers and our Facebook page had more than 2,753,000 likes.
In 2020,2012, we workedactivated an additional Twitter account, and in December 2022, this channel had over 273,000 followers and recorded more than 337,000 tweets. Our Instagram page has more than 445,000 followers. Meanwhile, in 2022, the MEU TIM app received the best rating among the service applications of Brazilian operators (grade 4.7 in the App Store).
Since 2021, we have been working to keep our “Customer Experience” foundational pillar as a focus (see “—Our Strategy”), creating initiatives that soughtseek to put the customer as the center of decision-making. The approach used to promote this cultural transformation was guided by the relationship between customercustomers and employee.employees.
We have evaluated and taken action to improve the experience and professional development of our employees, with educational projects to promote engagement and insight, focused not only on technical, functional or transversalsoft skills competences, but also on the new capabilities.capabilities required to reach industrial and business goals. 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 Mercer, considering several companies across the country, in which our employees’ performance in respect of “Quality and Customer Focus” improvedattained by 3pp (87%1pp (86%), from 20192020 to 2020.2021. Compared to the other telecom companies that also use this survey, TIM is 12pp (84)%10pp (84%) above average regarding this indicator. The business area responsible for supporting these initiatives was divided in three sections: Design, Execution and Monitoring.
The Design areaOur design team 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:
· | Customer Centric: being customer oriented, understanding their needs, the relationship and the value proposition they expect when interacting with the Company; |
· | 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; |
· | 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; and |
· | 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 |
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.our brand. We also work in teams to resolve critical issues and implement improvements in processes and systems.
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We also enhanced our interactive voice response channels to include more customer oriented services.
We completed the migration of prepaid and postpaid consumer back officeback-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). and other customer platforms revenues.
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 (Act No. 987/2020), our usage rate categories for local mobile services on a prepaid or postpaid basis are as follows:
Region of the | Values starting in | Values starting in | Values starting in | Values starting in February 25, 2023 |
I | R$ | R$ | R$ | R$ |
II | R$ | R$ | R$ | R$ |
III | R$ | R$ | R$ | R$ |
*General Authorization Plan (“GAP”) for Personal Mobile Service
· | 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. |
· | 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.” |
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.terms, which are regulated and previously approved by Anatel.
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Interconnection Charges
We receive interconnection revenues in connection withfor any callcalls 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. On the other hand, we must pay the fees for other telecommunications companies, when our users place a call to phones connected to other network operators.
We have entered into interconnection agreements with most of 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 theSuch 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,companies, and which other mobile telecommunications providerscompanies 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 ofas set forth in Resolution No. 639/2014,2014. 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.path, until 2019. Starting in 2020, Anatel has determined that VU-M values will rise slightly again. See “—Regulation of the Brazilian Telecommunications Industry—Interconnection Regulation.”
Long Distance
Telecommunications customers in Brazil are able to select long distance carriers on a per-call basis under the carrier code 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. 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. OtherWhen our customer chooses other long distance carriers, in turn, paythe other carrier pays us a VU-M fee for any use of our network for a long distance call.
As determinedVU-M is the fee another telecommunications service provider pays to us for the use of our network by Anatel, oursuch provider’s customers, in this case for long distance usage rate categories are as follows:calls. See “—Interconnection Charges.”
Origin | Tariff | Type | Value | Value |
Fixed phone | Post paid | fixed x fixed | 0,80 | 0,80 |
fixed x mobile | 2,56 | 2,56 | ||
Pre paid | fixed x fixed | 1,30 | 1,09 | |
fixed x mobile | 2,36 | 2,36 | ||
Mobile phone | Post paid | Mobile x fixed | 2,78 | 2,56 |
Mobile x mobile | 2,78 | 2,56 | ||
Pre paid | Mobile x fixed | 2,36 | 2,36 | |
Mobile x mobile | 2,36 | 2,36 | ||
International Long Distance – LDI | Group I | 0,65 | 0,65 | |
Group II | 0,97 | 0,97 | ||
Group III | 1,41 | 1,41 | ||
Group IV | 1,57 | 1,57 | ||
Group V | 2,69 | 2,69 | ||
Group VI | 3,63 | 3,63 | ||
Group VII | 5,30 | 5,30 | ||
Group VIII | 14,90 | 14,90 |
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 offee to provide such services are negotiated underservice to the supervision of Anatel.long distance carrier is defined by Anatel and the rate charged to the subscriber follows the rating plan from the long distance carrier.
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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 4G5G smartphone penetration, focusing on high quality 4G smartphones to enhance the customer experience.penetration. Our mobile handsets can be used in conjunction with either our prepaid or postpaid service plans. In 2020, TIM furthered 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.
Billing and Collection
Our company-wide, integrated billing and collection systems are provided by a third-party vendors. 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.
During 2020, after the implementation of improved operational controls and collection strategies and even considering the pandemic environment, we accomplished a significant bad debt reduction.
In 2020, we expanded our capillarity of collection methods, at the time being the only telecommunication company to offer the possibility of paying with the Instant Payment System fromnew instant payment system developed by the Central Bank (PIX)Brazilian central bank (known as PIX) to the entire customer base, which allows us to immediately recognize and act upon payments, e.g. to restore services of customers that were in default.
In 2022, we had our best bad debt ratio over revenue in recent years, even with the immediate recognitionchallenging economic scenario. In 2022, there was a considerable increase in the number of payment and also the immediate release of the defaulting customer.customers paying us with PIX.
Pursuant to Anatel regulations, we and other telephone service providers periodically reconcile the interconnection and roaming charges owed among us and 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 ofSeveral 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.
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Regional Overview
We provide 4G coverage in 3,8775,370 cities to 95.2%99% of the urban population of Brazil, making our 4G network the most extensive in the country. We continued our infrastructure evolution and expanded our 4.5G coverage to 1,922 cities by the end of December 2022. Our 3G coverage reaches 3,5064,132 municipalities and 92.8%94% of the urban population.
Lastly, 2022 was marked by the launch of 5G technology in Brazil, which seeks to meet the demand for higher connection speeds. We also offer GSM telecommunications services with a national reach to 95.2%ended 2022 having launched 5G technology in all 27 state capitals of the urban population, which is one of the most extensive GSM coverage areas in Brazil, with a presence in 3,476 municipalities.much higher number of antennas than required by Anatel, allowing us to provide an even better experience for our customers.
The following table shows information regarding Brazilian mobile telecommunications, at the dates indicated.
As of or For the Year Ended December 31, | As of or For the Year Ended December 31, | |||||
2020 | 2019 | 2018 | 2022 | 2021 | 2020 | |
Brazilian population (millions) | 211.8 | 210.1 | 208.5 | 207.8 | 213.3 | 211.8 |
Estimated total penetration (%) | 97.2 | 96.9 | 109.9 | 99.8 | 103.7 | 97.2 |
Brazilian wireless subscriber base (millions) | 234.1 | 226.7 | 229.2 | 251.9 | 254.7 | 234.1 |
National percentage subscriber growth (%) | 3.3 | (1.1) | (3.1) | (1.2) | 1.2 | 3.3 |
(1) | According to the last information disclosed by IBGE |
(2) | The 2021 and 2020 numbers were based on an estimate released by the IBGE and in light of actual data collected in respect of 2022, appeared to show an upward deviation which may have considered the population higher than it should have. |
(3) | Percentage of the total population of Brazil using mobile services, equating one mobile line to one subscriber (December |
Our Network
Our wireless networks use 4G, 3G and 2G technologies and cover approximately 96%100% of the urban Brazilian population. 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.coverage.
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, which 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’sour expanded 4G coverage through the 700 MHz band. Throughout 2020 and 2021, 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. In November 2021, we invested approximately R$1.1 billion to acquire the 2.3 GHz, 3.5 GHz and 26 GHz spectrum bands, aligned with our strategy of deploying 5G technology. See “—Regulation of the Brazilian Telecommunications Industry—Frequencies and Spectrum Background” and “—Regulation of the Brazilian Telecommunications Industry—Authorizations and Concessions.” In connection with the conclusion of the Reorganization whereby TIM Celular was merged into the Company, see “—Item 4. Information on the Company—C. Organizational Structure,” the Company holdswe hold all of the authorizations previously issued in the name of other companies controlled, directly or indirectly, by TIM Participaçõeses.
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RF authorizations are generally valid for a period of 15 years initially and are renewable for an additional 15 more,years, and our current authorizations will startstarted expiring in September 20222022.As such, we have started requesting renewals for the same period as the authorizations reach the end of their original term (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 reviewingrevisions to the General Telecommunications Law hashave had a meaningful impact for the sector, as the proposed updated law now 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.
As a result of our investment in infrastructure, on March 2022 we announced that we had completed our implementation of standalone 5G network CORE. This was necessary for us to be able to provide fifth-generation services in accordance with government requirements. Anatel approved a revised schedule for granting access to the 3.5 GHz spectrum band in order to activate the 5G network in the Brazilian capital and Federal District of Brasília after August 2022, commencing the commercial operations of 5G Standalone (5G SA) throughout Brazil. In 2022, we began the rollout and now have 5G coverage in Brasília and all 26 state capitals, with a special focus on the cities of São Paulo, Rio de Janeiro and Curitiba, where 100% of the neighborhoods were covered, and where we have the highest number of sites compared to our competitors.
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 2020,2021, we made R$3,8913,213 in investments, of which 91.2% of our capital expenditures were in infrastructure, primarily in capacity and coverage 4G, and 3G deployment,mainly using M-MIMO antennas, core functions virtualization, expansion and capacity enhancement of our optical transport networks, infrastructure resilience, quality maintenance and enabling of fiber-to-the-site and the mobile broadband MBB programs.
These investments allowed us to reach, by the end of 2020,2022, the milestone of 3,8775,370 cities with 4G coverage, or 95.2%99% 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.
On April 30,July 22, 2020, the Companywe obtained the approval of the Anatel and, on June 3, 2020, obtained the approval of the CADE for the execution of two onerous transfer contracts aimed at sharing 2G, 3G and 4G mobile network infrastructure, reinforcing the evolution process of the Brazilian telecommunications market in terms of network infrastructure sharing. For details see “—Site-sharing agreements.”
Our wireless network has both centralized and distributed functions, and includes mainly transmission equipment, consisting primarily of more than 14360 thousand eNodeBs in our 4G network, more than 2017 thousand NodeBs for the 3G layer and more than 13 thousand BTSs for 2G network as of December 2020,2022, 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.
Another priority is developing our national network. In December 2020,2022, 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 2019.well as integrating mobile sites acquired with Oi assets, reaching more than 10.500 of sites connected by optical fiber. The results are consistent with Anatel’s network quality requirements, and with TIM retaining its solid performance in 2020.2022. 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 the Company in 2018) has improved our optical fiber (or fiber optic) network presence in more than 3031 cities including the metropolitan regions of Rio de Janeiro, São Paulo, Salvador, Goiânia, Recife, Manaus, Belo Horizonte and Distrito Federal. Our optical fiber network has capacity to offer high quality ultra-broadband service, available through our TIM Live service.UltraFibra service and increase basic infrastructure to be applied in our fixed and mobile operations.
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Our fixed broadband infrastructure is highlighted by the following characteristics:
· | an extensive fiber transport network including a national backbone, regional fiber to the city and a metro network with more than 119,000 km of fiber; |
· | an extensive wide covered area network covering more than |
· | active Base of |
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.
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 2020,2022, we have deployed 1415 new virtualized Core Network Datacenters (DCC) located in Rio de Janeiro (2), São Paulo (2), Fortaleza (2), Salvador (2), Brasília (2), Belo Horizonte (2), Belém and Curitiba (2), in addition to 1119 new virtualized Edge Network Datacenters (DCE) located in Campinas, Porto Alegre, Natal, João Pessoa, Florianópolis, Blumenau, Maringá, Londrina, São Luis, Goiânia, Foz do Iguaçu, Santos, São José dos Campos, Uberlândia, Varginha, Feira de Santana, Teresina, Manaus and Ponta Grossa. Most of our core network functions are already running in a virtualized fashion by means of 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 functionfunction.
Similar to the movement of IT Systems to Public Cloud Infrastructure, Network Functions have also been planned to be migrated to the cloud, respecting their particularities regarding high availability and performance. In order to guarantee this movement, NFV Architecture had an important role for the evolution of these NFs from a Virtual environment (VNF) to a Cloud environment (CNF). As result of this journey, TIM intends to move Network workloads to a hybrid cloud (On-Premise and Public Cloud) throughout the next 3 years. TIM understands that Cloud Infrastructure is a second step (just after NFV) to establish an economically more efficient infrastructure, not only for reducing investment/costs, but also for speeding up project deployments and reducing time-to-market of new offers.
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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 solidquality infrastructure and quality improvement allow the Companyus 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, TIMwe implemented a Policy and Charging Control or PCC,(“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 animplemented in 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, TIMwe 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 2022, we started to implement our 5G Core, following 3GPP standards, providing 5G Standalone services for our customers, with new capabilities like reduced RTT – Round Trip Time and mission critical IoT services. The 5G core has being implemented in a Cloud environment (CNF).
In 2017, TIMwe 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 towas implemented in an NFV model since its inception, based on 3GPP’s nodes.
In 2018, TIMwe implemented a new security system to access itsour 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 haswe have a plan to mitigate network risk in case of unexpected events on a macro scale that prioritizes theour critical network infrastructure based on a risk map, or the Network Resilience Plan. The Network Resilience Plan allows the Companyus 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.network.
Sources and Availability of Raw Materials
Our business and results of operations are not significantly affected by the availability and prices of raw materials.
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Site-Sharing and Other AgreementsAgreements.
Network Decommissioning
From time to time, we are required to decommission our network equipment for a number of reasons, including: security, compliance, cost savings, resource optimization, efficiency, and others. With a complex network like ours, we periodically review our network requirements.
The year ended December 31, 2022 was a transformative year for our network decommissioning program. We implemented new models, which were materialized in new projects to manage our assets within budget limits. An effective and consistent communication channel was created and improved, called "RADAR 4.0". We implemented automations and procedural improvements that substantially reduced the number of service level agreements for decommissioning. We consolidated new models of reverse logistics, direct discard from industrial buildings (including IT and OSS), integrity control flows and "Decommissioning By Design" (when costs related to decommissioning are included in network optimization/evolution projects), increased production capacity through new service contracts, and sponsored the growth of our tax and accounting teams that contribute to the decommissioning process.
As a result, we were able to support the strong increase in demand generated by strategic projects such as the integration of SPE Cozani, the Vivo Sharing Agreement, the Integrity Control Appointments and others. We disassembled 55% more cabinets and discarded 25% more assets in comparison to 2021. And now, we have a more robust structure in place that is able to support the demand foreseen in 2023.
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 the Company 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 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. After Oi’s bankruptcy process, in 2022, we and Vivo requested CADE’s clearance for a contract addendum, in order to continue the sharing agreement without Oi. This clearance was granted by CADE on February, 13, 2023, and we are currently in the process of finalizing and executing the amendment to the agreement.
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, the Company, thoroughour predecessor entities, TIM Celular and Intelig both(which subsequently merged into the Company,to form TIM), 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.
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In March 2018, due to the mediation process between TIMourselves 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.
On July 23, 2019, the Companywe and Telefônica BrasilVivo 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 BrasilVivo 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,Vivo, 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). On April 30,Both agreements were approved without restrictions by CADE and Anatel in 2020, the Company obtained the approval of the Anatel and, on June 3, 2020, obtained the approval of the Administrative Council for Economic Defense (Conselho Administrativo de Defesa Econômica), or CADE, for the execution of two onerous transfer contracts aimed at sharing 2G, 3G and 4G mobile network infrastructure, reinforcing the evolution process of the Brazilian telecommunications market in terms of network infrastructure sharing.
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,us, Claro, Oi and Vivo to 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 1,966 cities.inhabitants through roaming agreements.
International Roaming Agreements
We have international roaming agreements available in 210 different countries with 423462 international operators that encompass 620591 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 2020,2022, we expanded our 4G data coverage to 7435 new networks, meaning now we offer 4G roaming in 81105 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, We have also started offering VoLTE 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 approved5G NSA on roaming; by the Brazilian Congressend of 2022 we had already established five VoLTE connections in two countries and will only be valid after two or more countries have ratified the agreement before the secretariat of Mercosur. 26 5G NSA connections in 16 countries.
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In November 2018, Brazil also entered into a free trade agreement with Chile, which resulted in the end of international roaming charges between the two countries. In October 13, 2021 the Legislative Decree No. 33/2021, which approved the free trade with Chile, was sanctioned by the President of the Senate. With the approval, the agreement came into force on January 25, 2022, and the end of roaming charges is expected by January 25, 2023. The agreement signed in July 2019 with other Mercosur countries to eliminate international roaming. In January 2023, the operational manual on international roaming services was approved through decision No.2 as established in Article 11.25 of the free trade agreement between Brazil and Chile.
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 Communication (Ministério das Comunicações). Anatel is responsible for reviewing and amending all administrative regulation regarding services, completion and customer’s rights related to telecommunications, issuing formal authorizations and performing inspections, 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.
In 1998, a presidential decree approved the first General Plan for Universalization Goals (Plano Geral de Metas de Universalização) (“PGMU”), obligations binding on the landline telephony services (Serviço Telefônico Móvel Comutado) (“STFC”), applicable only for fixed incumbents. PGMU is reviewed every 5 years, and the last universalization plan, formulated by the government, was published in January 2021 considering that fixed telephony concession will end in 2025. The PGMU V, replaces the 4G targets established in PGMU IV for construction of a backhaul in the municipalities that do not have a fiber optic connection.
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.
Another important set of rules is the Decree No. 9,612/2018, or the Connectivity Plan, which 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 available internet access by means of 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. As well as Decree No. 10,480/2020 that regulates the Antennas Law (Law No. 13,116/2015) with the objective of stimulating the development of the telecommunications network infrastructure.
Federal Government
In 2021 there were some important ordinances published, namely: (i) Ministry of Communications Decree No. 2,447/2021, which approved our issuance of up to R$5,753 billion in debentures; (ii) Ministry of Communications Decree No. 2,556, which set priorities and goals for the establishment of investments determined by Anatel; (iii) Decree No. 10,748, which established the Federal Network for the Management of Cyber Incidents, regulating the National Information Security Policy, which aims to improve and coordinate the bodies and entities of the federal public administration in the prevention, treatment and response to cyber incidents; (iv) Decree No. 10,887, which provided for the organization of the National Consumer Defense System, with the objective of guaranteeing greater protection to consumer relations, increasing legal certainty, and making the administrative process more efficient; and (v) Data Protection Authority Decree No. 15, which established the Governance Committee, responsible for establishing institutional strategies and strategic guidelines related to public governance.
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Also, there were some relevant decrees involving 5G. They were: (i) Decree No. 10,799 which updated Decree No. 9,612/2018 (telecom public policies), allowing the Government’s network to be built by other entities, not only Telebras; (ii) Decree No. 10,800 established the Amazon Integrated and Sustainable Program (PAIS). One of its objectives is to expand telecom networks to the Amazon region, in addition to creating a management committee to monitor them, among other provisions; and (iii) Ministry of Communications Decree No. 1,924/21 about 5G guidelines, mainly about network security; obligation to provide an exclusive government network; backhaul for agribusiness; coverage of federal highways aligned with the Ministry of Infrastructure, among others. In order to use the Universal Telecom Services Fund (FUST), (i.e. the contribution that the telecom sector makes annually), Law No. 14,109/2020 was introduced authorizing the use of FUST, including by the private sector, to expand connectivity in rural or urban areas with a low human development Index (HDI) as well as policies for education and tech innovation of services in rural areas.
In 2020, the Decree No. 10,480/2020 was published by the federal government, which regulates antennas (Law No. 13,116/2015) with the purpose of stimulating the development of telecommunications network infrastructure. This decree is aimed to foster development of telecommunication network infrastructure and is a major step towards unlocking historical problems in the sector preventing its development, for example, some historical problems that the regulation seeks to cure include free right of way on highways and railways, positive silence, small cells and dig once.
On 15 June 2021, Provisional Measure 1,018/2020 was transformed into Law No. 14,173/2021, reducing the charges for satellite internet terrestrial stations and changing some of the FUST application rules.
The law reduces FUST collection between 2022 and 2026 for telecommunications operators that run universalization programs approved by the management council (yet to be approved) with their own resources. The benefit will be valid for five years from 1 January 2022 and will be progressive: 10% in the first year; 25% in the second year; 40% in the third year; and 50% from the fourth year onwards.
In addition, the new legislation removes the obligation to share towers within a distance of less than 500 metres from each other. The withdrawal of this obligation was considered essential for the implementation of 5G in Brazil, including to allow for the expected increase in density for the new technology.
In 2022, Decree No. 10.952/2022 was published, establishing the transfer of R$3.5 billion of FUST collection for connectivity of students and teachers of basic public education and data provided by INEP as criteria for transferring resources. The decree also stipulates that the resources may be used for a fixed connection, provided that cost-effectiveness is proven or that there is no offer of mobile data in the location where the beneficiary students live.
In March 2022 Decree No. 11,004/22 was published, which defines how the Fund will be operationalized and foresees how the resources will be applied to any telecommunications service.
Also in 2022, Decree No. 11.304/2022 was published, establishing new rules for the Customer Service (SAC). The new “SAC Decree” brought more flexible rules regarding service hours, provision of protocol and digital service.
Anatel
Over the years, Anatel has published several Resolutions that apply obligations to the telecommunications sector, among which we can highlight:
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Resolutions published in 2022
(i) | Resolution No. 749/2022: this Resolution approved the Telecommunications Services Numbering Regulation; |
(ii) | Resolution No. 750/2022: this Resolution changes the Telecommunications Services Regulation – RST; |
(iii) | Resolution No. 751/2022: this Resolution amends the applicable regulation for changing procedures related to the inspection of the use of FUST; |
(iv) | Resolution No. 752/2022: this Resolution amends and revokes outdated and conflicting regulatory rules; |
(v) | Resolution No. 753/2022: this Resolution approved the Regulation of the Brazilian Communications Commissions; |
(vi) | Resolution No. 754/2022: this Resolution approved the new Regulation for the Universalization of Fixed Service provided in public regime; |
(vii) | Resolution No. 755/2022: this Resolution approved the new Pricing Regulation for the Fixed Service; |
(viii) | Resolution No. 756/2022: this Resolution changes the Regulation for Adaptation of Fixed Service Concessions; |
(ix) | Resolution No. 757/2022: this Resolution approved the new Regulation of Conditions of Use of Radiofrequencies; and |
(x) | Resolution No. 758/2022: this Resolution ensures the Brazil’s commitment to comply with Mercosur telecommunication regulation. |
Main Public Consultations held in 2022
(i) | Public Consultation No. 17: Revision proposal of the Joint Regulation No. 04/14 approved by ANEEL and Anatel to regulate the use of poles by telecommunication operators; |
(ii) | Public Consultation No. 23: Proposal for an Act for the use of radiofrequency bands between 4,800 and 4,990 MHz; |
(iii) | Public Consultation No. 27: Technical and operational requirements for radio navigation and radiolocation applications; |
(iv) | Public Consultation No. 36: Technical and operational requirements for coexistence and protection of radio altimeters; |
(v) | Public Consultation No. 41: Proposal to simplify the Services Regulation; |
(vi) | Public Consultation No. 48: Proposal of Anatel’s Regulatory Agenda for 2023-204; |
(vii) | Public Consultation No. 54: Proposal to update the Operating Procedure for Assigning Numbering Resources; and |
(viii) | Public Consultation No. 79: Proposal of technical requirements to Automated Frequency Coordination (AFC) in 6 GHz frequency. |
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Telecommunications Self-regulation System
In March 2020, telecommunication operators signed the Telecommunications Self-Regulation System, or SART, which proposes to establish common rules and procedures that must be followed by all participating companies, in relation to the most material topics in the relationship between providers and customers, such as telemarketing (approved in September 2019), offers (approved in March 2020), billing (approved in February 2021) and attendance (approved in March 2020).
Other Agencies
Recently, we also monitored and participated in Public Consultations carried out by Brazil’s national electricity agency, Agência Nacional de Energia Elétrica, or Aneel, on topics related to infrastructure sharing (poles) and distributed generation. The results of the Public Consultations are expected for the years 2023 and 2024.
Review of the Current Regulatory Model for the Provision of Telecommunications Services
In 2019, PLC 79/2016 was approved and converted into Law No. 13,879. The Law entered into force on October 4, establishing a new regulatory framework for the telecommunications sector in Brazil, the major regulatory change in 20 years.
The new telecommunications framework allows the fixed telephone concessionaires to adapt their agreements from a concession regime to an authorization regime. This change of concession to authorization must be requested by the concessionaire and it should be approved by the Anatel. In return, concessionaires must, among other conditions, make investment commitments to expand fixed broadband services, in areas without adequate competition for these services in order to minimize gaps and inequalities between Brazilian areas. Additionally, it also changes the rules on authorization of radiofrequency uses, establishing subsequent renewals and allows Radiofrequency trading among players (spectrum secondary market).
In June 2020, the Federal Government published Decree No. 10,402/2020 which regulates Law No 13,879/2019 and provides for the adaptation of the concession instrument to authorization of telecommunications service and on the extension and transfer of radiofrequency authorization, grants of telecommunications service and satellite exploration rights.
Decree No. 10,402/2020 establishes that the partial or full transfer of the authorization to use radio frequencies between telecommunications service providers will be carried out against payment by Anatel and must be preceded by Anatel’s consent, in addition to enabling the maintenance of obligations associated to radiofrequencies (serving the public interest), the application of restrictions of a competitive nature when necessary/convenient and the analysis of tax regularity of the company to which the authorization is being transferred. It also confirmed that the current authorizations are covered by the new rule for successive renewals.
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.
In connection with the conclusion of the Reorganization whereby TIM Celular was merged into the Company (see “Item 4. Information on the Company—C. Organizational Structure”). We hold all of the authorizations previously issued in the name of other companies controlled, directly or indirectly, by TIM Participações.
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Obligations of Telecommunications Companies
Among all the obligations imposed on telecommunications providers, Resolution No. 632/2014 has the most significant impact. Pursuant to this resolution, 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. This regulation was subject to a Public Consultation in 2020 and a new Regulation is expected to be approval in the first half of 2023.
In December 2019, Anatel approved RQUAL, which came into force in March 2022. After reviewing certain indicators, operators will be classified from A-E (expected to take place in 2023). See “—Quality Management Regulation.”
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 recent years, Anatel initiated certain 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 December 31, 2022, the total amount of these fines was R$270.1 million (after adjusting for inflation). However, only R$31.2 million (after adjusting for inflation) was classified as “probable loss” by our legal advisors. The significant amount related to fines classified as “possible loss” is a result of ongoing litigation.
On August 22, 2019, Anatel’s board of officers unanimously approved the execution of a TAC with TIM S.A., effective for 4 years from signature. The agreement covers fines imposed against us in the total amount of R$639 million. The commitment we assumed, as also approved by our Board of Directors on June 19, 2020, 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 350 cities with less than 30 thousand inhabitants thus reaching over 3.4 million people and the application of Internal Controls Management to ensure compliance with the closed proposal and the commitment to not impose inspection obstructions. As released to the market in June 16, 2020, and previously approved by Anatel on August 22, 2019, the TAC provided the implementation of the new infrastructure in three years, with our assurance that these areas will be shared with other providers.
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.
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In July 2018, Anatel published the New PGMC, which revised PGMC 2012 and created new markets: (i) mobile network; and (ii) national roaming; and (iii) 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:
PGMC 2012 | New PGMC | |
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 | * 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. Before coming into force, Anatel started revising these acts and, on February 24, 2020, published the new Acts Nos. 986/2020 and 987/2020.
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.
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Until July 2018, roaming reference values were provided for in Act No. 9,157/2018. After deliberation by Anatel's Board, the new values are now provided for in Act No. 8,822/2022.
In the high-capacity data transport, Anatel’s Board recently approved Act No. 15,944/2022, replacing Act No. 9,161/2018.
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.
In October 2011, Anatel established a mechanism for reducing fixed-to-mobile call rates, that results on a glide path to the reduction of mobile interconnection rates (VU-M) from 2012 to 2018, 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 No. 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. 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 2021 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 2022. 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.
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. 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 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, in 2018, it was also reduced to levels of R$0.03, in 2019, it was reduced to levels of R$0.01 and, in 2020, it was reduced to levels of R$0.03. In December 2020, 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.
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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.
The Presidential Decree No. 8,711/2016 was enacted by the Brazilian Congress. InPresident 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. The LGPD came into effect on September 18, 2020. However, the administrative sanctions provisions of LGPD only became enforceable as of August 1, 2021, Anatel was expectedpursuant to Law No. 14,010/2020. Cybersecurity incidents and data breach or leakage events may subject us to the following penalties: (1) warnings, with the imposition of a deadline for the adoption of corrective measures; (2) a one-time fine of up to 2% of gross sales of the company or a group of companies or a maximum amount of R$50,000,000 per violation; (3) a daily fine, up to a maximum amount of R$50,000,000 per violation; (4) public disclosure of the violation; (5) the restriction of access to the personal data to which the violation relates, until corrective measures are implemented; (6) deletion of the personal data to which the violation relates; (7) partial suspension of the databases to which the violation relates for up to 12 months, until corrective measures are implemented; (8) suspension of the personal data processing activities to which the violation relates for up to 12 months; and (9) partial or full prohibition on personal data processing activities. The postponement of the administrative sanctions did not prevent the competent authorities to begin supervision procedures and enactment of additional rules to be complied with prior to such effectiveness date, nor did it prevent individual or collective lawsuits based on violation of data subject’s rights and subject to civil liability.
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We have set up technical groupsa team tasked with adapting our processes and technologies to discussensure compliance with the detailsLGPD 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 training for all employees and salesforce as well as customized training 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 the Company). On March 2016, the authorizations for the D and E bands were renewed.
In December 2007, we acquired new authorizations for the 1,800 MHz frequency in 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.
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: we, Vivo, Claro and Nextel (now America Movil) acquired blocks of frequencies.
In December 2011, Anatel auctioned 16 blocks in the 1,800 MHz band, which 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.
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. Then, in 2022, through Act No. 12,827, published on September 13, 2022, the 450 MHz block was extinguished. As indicated in the notice, the winners of the implementationauction committed themselves to the waiver if services were not activated within the established time frame.
We participated in the auction as a group bidding in the name of bothTIM and Intelig (now known as TIM S.A.). We did not bid for the Mercosur agreementW 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 us, 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).
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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. As of September 2019, all Brazilian municipalities are able to receive TIM’s expanded 4G coverage through the 700 MHz band.
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.
In November 2021, TIM acquired 11 lots in the 5G Auction, with a total value offered of R$1.05 billion, in three frequency bands 3.5 GHz, 2.3 GHz and 26 GHz. The acquired bands have a set of obligations that must be met with financial contributions or the construction of mobile and fixed network infrastructure.
Currently, according to Decree No. 10,402/2020, which regulates Law No. 13,879/2019, it is possible to renew licenses for successive periods. However, some conditions are being disputed with Anatel and judicially, such as value and term of renewal.
The actual scenario of frequencies granted to us by Anatel is presented on the tables below:
Territory | Frequencies | |||||||
UF | 450 MHz | 700 MHz | 800 MHz | 900 MHz | 1800 MHz | Additional 1800 MHz | 1900 MHz (3G) | 2100 MHz (3G) |
Acre | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Alagoas | - | December 2029 | December 2023* | December 2023* | December 2023* | - | April 2023 | April 2023 |
Amapá | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Amazonas | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Bahia | - | December 2029 | August 2027* | August 2027* | August 2027* | - | April 2023 | April 2023 |
Ceará | - | December 2029 | November 2028* | November 2023* | December 2032* | - | April 2023 | April 2023 |
Distrito Federal | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Espírito Santo | October 2027 | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Goiás | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Maranhão | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Mato Grosso | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Mato Grosso do Sul | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Minas Gerais *** | - | December 2029 | April 2028* | April 2028* | April 2028* | April 2023 | April 2023 | April 2023 |
Pará | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
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Territory | Frequencies | |||||||
UF | 450 MHz | 700 MHz | 800 MHz | 900 MHz | 1800 MHz | Additional 1800 MHz | 1900 MHz (3G) | 2100 MHz (3G) |
Paraíba | - | December 2029 | November 2028* | December 2023* | November 2032* | - | April 2023 | April 2023 |
Paraná | October 2027 | December 2029 | November 2028* and March 2031* for the cities of Londrina and Tamarana | December 2032* and April 2023* for the cities of Londrina and Tamarana | December 2032* and April 2023* for the cities of Londrina and Tamarana | April 2023 | April 2023 | April 2023 |
Pernambuco | - | December 2029 | November 2028* | May 2024* | December 2032* | - | April 2023 | April 2023 |
Piauí | - | December 2029 | November 2028* | March 2024* | December 2032* | - | April 2023 | April 2023 |
Rio de Janeiro | October 2027 | December 2029 | March 2031* | March 2031* | March 2031* | - | April 2023 | April 2023 |
Rio Grande do Norte | - | December 2029 | November 2028* | December 2023* | December 2032* | - | April 2023 | April 2023 |
Rio Grande do Sul | - | December 2029 | March 2031* and November 2028* city of Pelotas and its surrounding region | March 2031* and April 2024* city of Pelotas and its surrounding region | March 2031* and December 2032* city of Pelotas and its surrounding region | April 2023 | April 2023 | April 2023 |
Rondônia | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Roraima | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Santa Catarina | October 2027 | December 2029 | November 2028* | September 2023* | December 2032* | April 2023 | April 2023 | April 2023 |
São Paulo | - | December 2029 | March 2031* | March 2031* | March 2031* | Interior – April 2023 | April 2023 | April 2023 |
Sergipe | - | December 2029 | August 2027* | August 2027* | August 2027* | - | April 2023 | April 2023 |
Tocantins | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Territory | Frequencies | ||||||
UF | 2300 MHz | 2500 MHz V1 Band (4G) | 2500 MHz P Band** (4G) | 3500 MHz (5G) | 26 GHz (5G) | Additional 26 GHz (5G) | Additional 26 GHz (5G) |
Acre | - | October 2027 | - | December 2041 | December 2031 | - | - |
Alagoas | - | October 2027 | - | December 2041 | December 2031 | - | - |
Amapá | - | October 2027 | - | December 2041 | December 2031 | - | - |
Amazonas | - | October 2027 | - | December 2041 | December 2031 | - | - |
Bahia | - | October 2027 | - | December 2041 | December 2031 | - | - |
Ceará | - | October 2027 | - | December 2041 | December 2031 | - | - |
Distrito Federal | - | October 2027 | February 2024* | December 2041 | December 2031 | - | - |
Espírito Santo | December 2041 | October 2027 | - | December 2041 | December 2031 | December 2031 | December 2041 |
Goiás | - | October 2027 | - | December 2041 | December 2031 | - | - |
Maranhão | - | October 2027 | - | December 2041 | December 2031 | - | - |
Mato Grosso | - | October 2027 | - | December 2041 | December 2031 | - | - |
Mato Grosso do Sul | - | October 2027 | - | December 2041 | December 2031 | - | - |
Minas Gerais *** | December 2041 | October 2027 | February 2030* | December 2041 | December 2031 | December 2031 | December 2041 |
Pará | - | October 2027 | February 2024* | December 2041 | December 2031 | - | - |
Paraíba | - | October 2027 | - | December 2041 | December 2031 | - | - |
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Territory | Frequencies | ||||||
UF | 2300 MHz | 2500 MHz V1 Band (4G) | 2500 MHz P Band** (4G) | 3500 MHz (5G) | 26 GHz (5G) | Additional 26 GHz (5G) | Additional 26 GHz (5G) |
Paraná | December 2041 | October 2027 | July 2031 (city of Curitiba and Metropolitan Region) and February 2024* AR 41, except Curitiba and Metropolitan Region | December 2041 | December 2031 | December 2031 | December 2041 |
Pernambuco | - | October 2027 | July 2031 (city of Recife) | December 2041 | December 2031 | - | - |
Piauí | - | October 2027 | - | December 2041 | December 2031 | - | - |
Rio de Janeiro | December 2041 | October 2027 | February 2024* | December 2041 | December 2031 | December 2031 | December 2041 |
Rio Grande do Norte | - | October 2027 | - | December 2041 | December 2031 | - | - |
Rio Grande do Sul | December 2041 | October 2027 | - | December 2041 | December 2031 | December 2031 | December 2041 |
Rondônia | - | October 2027 | - | December 2041 | December 2031 | - | - |
Roraima | - | October 2027 | - | December 2041 | December 2031 | - | - |
Santa Catarina | December 2041 | October 2027 | - | December 2041 | December 2031 | December 2031 | December 2041 |
São Paulo | - | October 2027 | - | December 2041 | December 2031 | December 2031 (except sector 33) | December 2041 (except sector 33) |
Sergipe | - | October 2027 | - | December 2041 | December 2031 | - | - |
Tocantins | - | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 |
* | Terms already renewed for 15 years. |
** | Only covers complementary areas in the specified states. The Radio frequency Blocks of the Municipalities of the National Code 92, which were part of Lot 208, were returned. |
*** | Except for the cities in sector 3 of PGO for 3G and excess radio frequency. |
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 Chile free trade agreement,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. In addition to these perspectives, we contribute to reduce social disparities, offering the same technology to our customers, as well as content residing locally in our data centers, making no difference to the technical architecture built in a big metropolitan centers.
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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. 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.
Quality Management Regulation
In October 2011, Anatel published PCS and SCM quality management regulations to establish quality parameters which were to have been delayed duemet by the mobile telephone and Internet connection operators in up to 12 months. Most quality parameters established relating to the COVID-19 pandemic.quality of the networks, both mobile and fixed, became effective in October and November 2012.
In response to the need to better quantify the financial impacts, Oi submitted a request for cancellation together with a request for review to Anatel for the presentation of technical surveys of the economic impacts of the new regulations. The aforementioned request was submitted to public hearing by Anatel, which resulted in a series of divergent opinions regarding the quality measures by the different operations that are being analyzed by Anatel.
With regard to STFC, in December 2012, Anatel approved the Quality Management Regulation for STFC service providers, which aims to create a new quality management model available, such as the Quality for PCS and SCM.
In February 2013, Anatel published the STFC quality management regulations to establish quality parameters that must be met by fixed-line operators within 120 days. All established parameters took effective in June 2013.
In December 2019, Anatel approved the new Telecommunication Services Quality Regulation (“RQUAL”) based on a reactive regulation. In this new model, quality is measured on the basis of three main indicators – a Service Quality Index, a Perceived Quality Index and a User Complaints Index – and operators are classified into five categories (A to E). Based on this regulation, Anatel will be able to take measures according to specific cases, such as consumer compensation, the adoption of an action plan or the adoption of precautionary measures to ensure quality standard improvements.
At the end of November 2021, after a joint work by Anatel, operators and the Quality Assurance Support Authority to define the objectives, criteria and reference values of indicators, Anatel’s Board of Directors formalized the reference documents that anchor this regulation (the Operational Manual and the Reference Values) and stipulated the entry into force on March 1, 2022. Anatel will also disclose the official indexes, and the quality label (intended to increase competition for quality) in 2023, considering the results of the new indicators monitored in the second half of 2022. Meanwhile, adjustments to the criteria and reference values can be made by Anatel.
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Fraud Detection and Prevention
“Subscription fraud,” which consists of using identification documents or personal 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 includefraud, such as: (i) digital authentication for our sales front-end system,system; (ii) a strong training program, maintainingprogram; (iii) maintenance of a blacklistlist of offenders to prevent fraud,fraud; (iv) analysis of the documentation presentedpresented; and (v) 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’sour 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 onRegulation of the Brazilian Telecommunications Goods and ServicesIndustry
General
The telecommunications goodssector is regulated by Anatel, which was established by law and is administratively independent and financially autonomous from the Ministry of Communication (Ministério das Comunicações). Anatel is responsible for reviewing and amending all administrative regulation regarding services, completion and customer’s rights related to telecommunications, issuing formal authorizations and performing inspections, 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.
In 1998, a presidential decree approved the first General Plan for Universalization Goals (Plano Geral de Metas de Universalização) (“PGMU”), obligations binding on the landline telephony services (Serviço Telefônico Móvel Comutado) (“STFC”), applicable only for fixed incumbents. PGMU is reviewed every 5 years, and the last universalization plan, formulated by the government, was published in January 2021 considering that fixed telephony concession will end in 2025. The PGMU V, replaces the 4G targets established in PGMU IV for construction of a backhaul in the municipalities that do not have a fiber optic connection.
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.
Another important set of rules is the Decree No. 9,612/2018, or the Connectivity Plan, which established a varietyseries 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 available internet access by means of 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. As well as Decree No. 10,480/2020 that regulates the Antennas Law (Law No. 13,116/2015) with the objective of stimulating the development of the telecommunications network infrastructure.
Federal Government
In 2021 there were some important ordinances published, namely: (i) Ministry of Communications Decree No. 2,447/2021, which approved our issuance of up to R$5,753 billion in debentures; (ii) Ministry of Communications Decree No. 2,556, which set priorities and goals for the establishment of investments determined by Anatel; (iii) Decree No. 10,748, which established the Federal Network for the Management of Cyber Incidents, regulating the National Information Security Policy, which aims to improve and coordinate the bodies and entities of the federal public administration in the prevention, treatment and response to cyber incidents; (iv) Decree No. 10,887, which provided for the organization of the National Consumer Defense System, with the objective of guaranteeing greater protection to consumer relations, increasing legal certainty, and making the administrative process more efficient; and (v) Data Protection Authority Decree No. 15, which established the Governance Committee, responsible for establishing institutional strategies and strategic guidelines related to public governance.
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Also, there were some relevant decrees involving 5G. They were: (i) Decree No. 10,799 which updated Decree No. 9,612/2018 (telecom public policies), allowing the Government’s network to be built by other entities, not only Telebras; (ii) Decree No. 10,800 established the Amazon Integrated and Sustainable Program (PAIS). One of its objectives is to expand telecom networks to the Amazon region, in addition to creating a management committee to monitor them, among other provisions; and (iii) Ministry of Communications Decree No. 1,924/21 about 5G guidelines, mainly about network security; obligation to provide an exclusive government network; backhaul for agribusiness; coverage of federal statehighways aligned with the Ministry of Infrastructure, among others. In order to use the Universal Telecom Services Fund (FUST), (i.e. the contribution that the telecom sector makes annually), Law No. 14,109/2020 was introduced authorizing the use of FUST, including by the private sector, to expand connectivity in rural or urban areas with a low human development Index (HDI) as well as policies for education and local taxes (intech innovation of services in rural areas.
In 2020, the Decree No. 10,480/2020 was published by the federal government, which regulates antennas (Law No. 13,116/2015) with the purpose of stimulating the development of telecommunications network infrastructure. This decree is aimed to foster development of telecommunication network infrastructure and is a major step towards unlocking historical problems in the sector preventing its development, for example, some historical problems that the regulation seeks to cure include free right of way on highways and railways, positive silence, small cells and dig once.
On 15 June 2021, Provisional Measure 1,018/2020 was transformed into Law No. 14,173/2021, reducing the charges for satellite internet terrestrial stations and changing some of the FUST application rules.
The law reduces FUST collection between 2022 and 2026 for telecommunications operators that run universalization programs approved by the management council (yet to be approved) with their own resources. The benefit will be valid for five years from 1 January 2022 and will be progressive: 10% in the first year; 25% in the second year; 40% in the third year; and 50% from the fourth year onwards.
In addition, the new legislation removes the obligation to taxes on income),share towers within a distance of less than 500 metres from each other. The withdrawal of this obligation was considered essential for the most significantimplementation of 5G in Brazil, including to allow for the expected increase in density for the new technology.
In 2022, Decree No. 10.952/2022 was published, establishing the transfer of R$3.5 billion of FUST collection for connectivity of students and teachers of basic public education and data provided by INEP as criteria for transferring resources. The decree also stipulates that the resources may be used for a fixed connection, provided that cost-effectiveness is proven or that there is no offer of mobile data in the location where the beneficiary students live.
In March 2022 Decree No. 11,004/22 was published, which are ICMS, ISS, COFINS, PIS, FUST, FUNTTEL, FISTEL, CONDECINEdefines how the Fund will be operationalized and Corporate Income Taxforesees how the resources will be applied to any telecommunications service.
Also in 2022, Decree No. 11.304/2022 was published, establishing new rules for the Customer Service (SAC). The new “SAC Decree” brought more flexible rules regarding service hours, provision of protocol and Social Contribution on Net Income,digital service.
Anatel
Over the years, Anatel has published several Resolutions that apply obligations to the telecommunications sector, among which are described below.we can highlight:
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Resolutions published in 2022
(v) | Resolution No. 753/2022: this Resolution approved the |
(vi) | Resolution No. 754/2022: this Resolution approved the new Regulation for the Universalization of Fixed Service provided in public regime; |
(vii) | Resolution No. 755/2022: this Resolution approved the new Pricing Regulation for the Fixed Service; |
(viii) | Resolution No. 756/2022: this Resolution changes the Regulation for Adaptation of Fixed Service Concessions; |
(ix) | Resolution No. 757/2022: this Resolution approved the new Regulation of Conditions of Use of Radiofrequencies; and |
(x) | Resolution No. 758/2022: this Resolution ensures the Brazil’s commitment to comply with Mercosur telecommunication regulation. |
Main Public Consultations held in 2022
(i) | Public Consultation No. 17: Revision proposal of the Joint Regulation No. 04/14 approved by ANEEL and Anatel to regulate the use of poles by telecommunication operators; |
(ii) | Public Consultation No. 23: Proposal for an Act for the use of radiofrequency bands between 4,800 and 4,990 MHz; |
(iii) | Public Consultation No. 27: Technical and operational requirements for radio navigation and radiolocation applications; |
(iv) | Public Consultation No. 36: Technical and operational requirements for coexistence and protection of radio altimeters; |
(v) | Public Consultation No. 41: Proposal to simplify the Services Regulation; |
(vi) | Public Consultation No. 48: Proposal of Anatel’s Regulatory Agenda for 2023-204; |
(vii) | Public Consultation No. 54: Proposal to update the Operating Procedure for Assigning Numbering Resources; and |
(viii) | Public Consultation No. 79: Proposal of technical requirements to Automated Frequency Coordination (AFC) in 6 GHz frequency. |
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Telecommunications Self-regulation System
In 2005, Anatel enacted OrdinanceMarch 2020, telecommunication operators signed the Telecommunications Self-Regulation System, or SART, which proposes to establish common rules and procedures that must be followed by all participating companies, in relation to the most material topics in the relationship between providers and customers, such as telemarketing (approved in September 2019), offers (approved in March 2020), billing (approved in February 2021) and attendance (approved in March 2020).
Other Agencies
Recently, we also monitored and participated in Public Consultations carried out by Brazil’s national electricity agency, Agência Nacional de Energia Elétrica, or Aneel, on topics related to infrastructure sharing (poles) and distributed generation. The results of the Public Consultations are expected for the years 2023 and 2024.
Review of the Current Regulatory Model for the Provision of Telecommunications Services
In 2019, PLC 79/2016 was approved and converted into Law No. 7/05 requiring that FUST13,879. The Law entered into force on October 4, establishing a new regulatory framework for the telecommunications sector in Brazil, the major regulatory change in 20 years.
The new telecommunications framework allows the fixed telephone concessionaires to adapt their agreements from a concession regime to an authorization regime. This change of concession to authorization must be requested by the concessionaire and it should be paid on revenues arising from interconnection charges since its effectiveness. A notice was issued deciding that weapproved by the Anatel. In return, concessionaires must, adjust values on the FUST calculation basisamong other conditions, make investment commitments to expand fixed broadband services, in areas without adequate competition for these services in order to include interconnection revenues received from other telecommunications companies. A writminimize gaps and inequalities between Brazilian areas. Additionally, it also changes the rules on authorization of mandamus was filed against Anatel to avoidradiofrequency uses, establishing subsequent renewals and allows Radiofrequency trading among players (spectrum secondary market).
In June 2020, the terms of OrdinanceFederal Government published Decree No. 7/05. The first level decision was issued in our favor. Such decision was challenged by Anatel and the Appeal judgement confirmed the first level decision. Anatel appealed to High Courts in order to reverse the Appeal decision.
In 2013, Anatel enacted Resolution No. 95,10,402/2020 which regulates FUNTTEL collection. As inLaw No 13,879/2019 and provides for the caseadaptation of FUST, it requires that FUNTTEL be calculated based upon revenues arising from interconnection charges since its effectiveness. Sinditelebrasil, the Brazilian syndicateconcession instrument to authorization 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 favorservice and a favorable final decision was issued by the Federal 1st Region High Courts of Appeal.
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 additionsextension and transfer of radio base stations. The operations inspection fee equals 33%radiofrequency authorization, grants of telecommunications service and satellite exploration rights.
Decree No. 10,402/2020 establishes that the partial or full transfer 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 rightauthorization to use radio frequencies between telecommunications service providers will be carried out against payment by Anatel and must be preceded by Anatel’s consent, in addition to enabling the maintenance of obligations associated to radiofrequencies (serving the public interest), the application of restrictions of a competitive nature when necessary/convenient and the analysis of tax regularity of the company to which the authorization is being transferred. It also confirmed that the current authorizations are covered by the new rule for successive renewals.
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.
In connection with the operationconclusion of the personal mobile service. TheReorganization whereby TIM Celular was merged into the Company understands that such collection is unjustified and is challenging this rate(see “Item 4. Information on the Company—C. Organizational Structure”). We hold all of the authorizations previously issued in court.the name of other companies controlled, directly or indirectly, by TIM Participações.
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The FISTEL feeObligations of Telecommunications Companies
Among all the obligations imposed on telecommunications providers, Resolution No. 632/2014 has the most significant impact. Pursuant to be paid in 2020 was deferred due to Provisional Measure No. 952, enacted in April 15, 2020. Therefore, up to December 31, 2020, the FISTEL fee was not paid based on an injunction issued by the Regional Court of the 1st Region.
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 bythis resolution, Anatel approved the adoption of IFRS accountinga 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. This regulation was subject to a Public Consultation in lieu2020 and a new Regulation is expected to be approval in the first half of Brazilian GAAP.2023.
In 2014, Provisional Measure No. 627 wasDecember 2019, Anatel approved RQUAL, which came into force in March 2022. After reviewing certain indicators, operators will be classified from A-E (expected to take place in 2023). See “—Quality Management Regulation.”
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 Law No. 12,973,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 main objective of which wasReorganization and various intercompany mergers discussed herein) subject to implementobligations under 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 methodsPCS regulations. See “—Authorizations 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.Concessions.”
The rules for deductibility of goodwill were maintained for transactions which occurred prior to the end of 2017. The tax treatment byIn recent years, Anatel initiated certain 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 December 31, 2022, the goodwill arisingtotal amount of these fines was R$270.1 million (after adjusting for inflation). However, only R$31.2 million (after adjusting for inflation) was classified as “probable loss” by our legal advisors. The significant amount related to fines classified as “possible loss” is a result of ongoing litigation.
On August 22, 2019, Anatel’s board of officers unanimously approved the execution of a TAC with TIM S.A., effective for 4 years 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, in relation to exemption on profits and dividends generatedsignature. The agreement covers fines imposed against us in the calendar year 2014, if highertotal amount of R$639 million. The commitment we assumed, as also approved by our Board of Directors on June 19, 2020, 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 350 cities with less than 30 thousand inhabitants thus reaching over 3.4 million people and the taxable incomeapplication of Internal Controls Management to ensure compliance with the closed proposal and the commitment to not impose inspection obstructions. As released to the market in June 16, 2020, and previously approved by Anatel on August 22, 2019, the same period inTAC provided the case of companies that do not opt for early adoptionimplementation of the new post-RTT taxinfrastructure in three years, with our assurance that these areas will be shared with other providers.
We continue to do our best to fully comply with our obligations under the PCS regime that year. Accordingor with future changes in the regulations to the Federal tax authorities the exception is not applicablewhich we are subject. See “—Obligations of Telecommunications Companies,” “Item 3. Key Information—D. Risk Factors—Risks Relating to the excess amount, or in other words, to the profitsour Business” and dividends paid in excess of the taxable income.“Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings.”
Dividends are not subject to withholding income tax when paid. However,Significant Market Power
In November 2012, Anatel published a new competition framework known as the paymentPGMC 2012. Also in November 2012, Anatel published a series of dividends is not tax deductibleregulations 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 company that is distributing them, there is an alternative regimeApproval of Reference Offers, 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 12.5% for some jurisdictions, as provided in certain Double Taxation Treaties), or 25% in the case of a stockholder 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, we and our subsidiaries paid interest on equity in 2020. Please refer to “Item 4. Information of the Company—2020 Important Events—Interest on Equity” for detailed information.
Tax 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.public comment until March 22, 2017.
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Companies are taxedIn July 2018, Anatel published the New PGMC, which revised PGMC 2012 and created new markets: (i) mobile network; and (ii) national roaming; and (iii) 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:
PGMC 2012 | New PGMC | |
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 | * 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 worldwide incomemobile 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. Before coming into force, Anatel started revising these acts and, on February 24, 2020, published the new Acts Nos. 986/2020 and 987/2020.
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.
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Until July 2018, roaming reference values were provided for in Act No. 9,157/2018. After deliberation by Anatel's Board, the new values are now provided for in Act No. 8,822/2022.
In the high-capacity data transport, Anatel’s Board recently approved Act No. 15,944/2022, replacing Act No. 9,161/2018.
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.
In October 2011, Anatel established a mechanism for reducing fixed-to-mobile call rates, that results on a glide path to the reduction of mobile interconnection rates (VU-M) from 2012 to 2018, 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 No. 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. 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 2021 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 2022. 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.
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. 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 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, in 2018, it was also reduced to levels of R$0.03, in 2019, it was reduced to levels of R$0.01 and, in 2020, it was reduced to levels of R$0.03. In December 2020, 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.
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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 on income produced solelytelecommunications 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.
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. The LGPD came into effect on September 18, 2020. However, the administrative sanctions provisions of LGPD only became enforceable as of August 1, 2021, pursuant to Law No. 14,010/2020. Cybersecurity incidents and data breach or leakage events may subject us to the following penalties: (1) warnings, with the imposition of a deadline for the adoption of corrective measures; (2) a one-time fine of up to 2% of gross sales of the company or a group of companies or a maximum amount of R$50,000,000 per violation; (3) a daily fine, up to a maximum amount of R$50,000,000 per violation; (4) public disclosure of the violation; (5) the restriction of access to the personal data to which the violation relates, until corrective measures are implemented; (6) deletion of the personal data to which the violation relates; (7) partial suspension of the databases to which the violation relates for up to 12 months, until corrective measures are implemented; (8) suspension of the personal data processing activities to which the violation relates for up to 12 months; and (9) partial or full prohibition on personal data processing activities. The postponement of the administrative sanctions did not prevent the competent authorities to begin supervision procedures and enactment of additional rules to be complied with prior to such effectiveness date, nor did it prevent individual or collective lawsuits based on violation of data subject’s rights and subject to civil liability.
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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 training for all employees and salesforce as well as customized training 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 the Company). On March 2016, the authorizations for the D and E bands were renewed.
In December 2007, we acquired new authorizations for the 1,800 MHz frequency in 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.
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: we, Vivo, Claro and Nextel (now America Movil) acquired blocks of frequencies.
In December 2011, Anatel auctioned 16 blocks in the 1,800 MHz band, which were sold to Claro, Oi, CTBC and TIM. As a result profits,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.
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. Then, in 2022, through Act No. 12,827, published on September 13, 2022, the 450 MHz block was extinguished. As indicated in the notice, the winners of the auction committed themselves to the waiver if services were not activated within the established time frame.
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 gainsexpenditure/operating expenditure profile associated with rural services in its selected regions (the States of Rio de Janeiro, Espírito Santo, Santa Catarina, and other income obtained abroad by Brazilian entities areParaná). 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 us, Vivo, Claro and Algar the operation of the 700 MHz frequency for the 4G mobile technology, to be added to their net profits for tax purposes. Therefore, profits, capital gains and other income obtained by foreign branches or income obtained from subsidiaries or foreign corporations controlled by a Brazilian entity are computedthe current LTE service in the calculation2.5 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).
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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. As of September 2019, all Brazilian municipalities are able to receive TIM’s expanded 4G coverage through the 700 MHz band.
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.
In November 2021, TIM acquired 11 lots in the 5G Auction, with a total value offered of R$1.05 billion, in three frequency bands 3.5 GHz, 2.3 GHz and 26 GHz. The acquired bands have a set of obligations that must be met with financial contributions or the construction of mobile and fixed network infrastructure.
Currently, according to Decree No. 10,402/2020, which regulates Law No. 13,879/2019, it is possible to renew licenses for successive periods. However, some conditions are being disputed with Anatel and judicially, such as value and term of renewal.
The actual scenario of frequencies granted to us by Anatel is presented on the tables below:
Territory | Frequencies | |||||||
UF | 450 MHz | 700 MHz | 800 MHz | 900 MHz | 1800 MHz | Additional 1800 MHz | 1900 MHz (3G) | 2100 MHz (3G) |
Acre | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Alagoas | - | December 2029 | December 2023* | December 2023* | December 2023* | - | April 2023 | April 2023 |
Amapá | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Amazonas | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Bahia | - | December 2029 | August 2027* | August 2027* | August 2027* | - | April 2023 | April 2023 |
Ceará | - | December 2029 | November 2028* | November 2023* | December 2032* | - | April 2023 | April 2023 |
Distrito Federal | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Espírito Santo | October 2027 | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Goiás | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Maranhão | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Mato Grosso | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Mato Grosso do Sul | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Minas Gerais *** | - | December 2029 | April 2028* | April 2028* | April 2028* | April 2023 | April 2023 | April 2023 |
Pará | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
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Territory | Frequencies | |||||||
UF | 450 MHz | 700 MHz | 800 MHz | 900 MHz | 1800 MHz | Additional 1800 MHz | 1900 MHz (3G) | 2100 MHz (3G) |
Paraíba | - | December 2029 | November 2028* | December 2023* | November 2032* | - | April 2023 | April 2023 |
Paraná | October 2027 | December 2029 | November 2028* and March 2031* for the cities of Londrina and Tamarana | December 2032* and April 2023* for the cities of Londrina and Tamarana | December 2032* and April 2023* for the cities of Londrina and Tamarana | April 2023 | April 2023 | April 2023 |
Pernambuco | - | December 2029 | November 2028* | May 2024* | December 2032* | - | April 2023 | April 2023 |
Piauí | - | December 2029 | November 2028* | March 2024* | December 2032* | - | April 2023 | April 2023 |
Rio de Janeiro | October 2027 | December 2029 | March 2031* | March 2031* | March 2031* | - | April 2023 | April 2023 |
Rio Grande do Norte | - | December 2029 | November 2028* | December 2023* | December 2032* | - | April 2023 | April 2023 |
Rio Grande do Sul | - | December 2029 | March 2031* and November 2028* city of Pelotas and its surrounding region | March 2031* and April 2024* city of Pelotas and its surrounding region | March 2031* and December 2032* city of Pelotas and its surrounding region | April 2023 | April 2023 | April 2023 |
Rondônia | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Roraima | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Santa Catarina | October 2027 | December 2029 | November 2028* | September 2023* | December 2032* | April 2023 | April 2023 | April 2023 |
São Paulo | - | December 2029 | March 2031* | March 2031* | March 2031* | Interior – April 2023 | April 2023 | April 2023 |
Sergipe | - | December 2029 | August 2027* | August 2027* | August 2027* | - | April 2023 | April 2023 |
Tocantins | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Territory | Frequencies | ||||||
UF | 2300 MHz | 2500 MHz V1 Band (4G) | 2500 MHz P Band** (4G) | 3500 MHz (5G) | 26 GHz (5G) | Additional 26 GHz (5G) | Additional 26 GHz (5G) |
Acre | - | October 2027 | - | December 2041 | December 2031 | - | - |
Alagoas | - | October 2027 | - | December 2041 | December 2031 | - | - |
Amapá | - | October 2027 | - | December 2041 | December 2031 | - | - |
Amazonas | - | October 2027 | - | December 2041 | December 2031 | - | - |
Bahia | - | October 2027 | - | December 2041 | December 2031 | - | - |
Ceará | - | October 2027 | - | December 2041 | December 2031 | - | - |
Distrito Federal | - | October 2027 | February 2024* | December 2041 | December 2031 | - | - |
Espírito Santo | December 2041 | October 2027 | - | December 2041 | December 2031 | December 2031 | December 2041 |
Goiás | - | October 2027 | - | December 2041 | December 2031 | - | - |
Maranhão | - | October 2027 | - | December 2041 | December 2031 | - | - |
Mato Grosso | - | October 2027 | - | December 2041 | December 2031 | - | - |
Mato Grosso do Sul | - | October 2027 | - | December 2041 | December 2031 | - | - |
Minas Gerais *** | December 2041 | October 2027 | February 2030* | December 2041 | December 2031 | December 2031 | December 2041 |
Pará | - | October 2027 | February 2024* | December 2041 | December 2031 | - | - |
Paraíba | - | October 2027 | - | December 2041 | December 2031 | - | - |
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Territory | Frequencies | ||||||
UF | 2300 MHz | 2500 MHz V1 Band (4G) | 2500 MHz P Band** (4G) | 3500 MHz (5G) | 26 GHz (5G) | Additional 26 GHz (5G) | Additional 26 GHz (5G) |
Paraná | December 2041 | October 2027 | July 2031 (city of Curitiba and Metropolitan Region) and February 2024* AR 41, except Curitiba and Metropolitan Region | December 2041 | December 2031 | December 2031 | December 2041 |
Pernambuco | - | October 2027 | July 2031 (city of Recife) | December 2041 | December 2031 | - | - |
Piauí | - | October 2027 | - | December 2041 | December 2031 | - | - |
Rio de Janeiro | December 2041 | October 2027 | February 2024* | December 2041 | December 2031 | December 2031 | December 2041 |
Rio Grande do Norte | - | October 2027 | - | December 2041 | December 2031 | - | - |
Rio Grande do Sul | December 2041 | October 2027 | - | December 2041 | December 2031 | December 2031 | December 2041 |
Rondônia | - | October 2027 | - | December 2041 | December 2031 | - | - |
Roraima | - | October 2027 | - | December 2041 | December 2031 | - | - |
Santa Catarina | December 2041 | October 2027 | - | December 2041 | December 2031 | December 2031 | December 2041 |
São Paulo | - | October 2027 | - | December 2041 | December 2031 | December 2031 (except sector 33) | December 2041 (except sector 33) |
Sergipe | - | October 2027 | - | December 2041 | December 2031 | - | - |
Tocantins | - | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 |
* | Terms already renewed for 15 years. |
** | Only covers complementary areas in the specified states. The Radio frequency Blocks of the Municipalities of the National Code 92, which were part of Lot 208, were returned. |
*** | Except for the cities in sector 3 of PGO for 3G and excess radio frequency. |
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. In addition to these perspectives, we contribute to reduce social disparities, offering the same technology to our customers, as well as content residing locally in our data centers, making no difference to the technical architecture built in a big metropolitan centers.
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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. 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.
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.
In response to the need to better quantify the financial impacts, Oi submitted a request for cancellation together with a request for review to Anatel for the presentation of technical surveys of the economic impacts of the new regulations. The aforementioned request was submitted to public hearing by Anatel, which resulted in a series of divergent opinions regarding the quality measures by the different operations that are being analyzed by Anatel.
With regard to STFC, in December 2012, Anatel approved the Quality Management Regulation for STFC service providers, which aims to create a new quality management model available, such as the Quality for PCS and SCM.
In February 2013, Anatel published the STFC quality management regulations to establish quality parameters that must be met by fixed-line operators within 120 days. All established parameters took effective in June 2013.
In December 2019, Anatel approved the new Telecommunication Services Quality Regulation (“RQUAL”) based on a reactive regulation. In this new model, quality is measured on the basis of three main indicators – a Service Quality Index, a Perceived Quality Index and a User Complaints Index – and operators are classified into five categories (A to E). Based on this regulation, Anatel will be able to take measures according to specific cases, such as consumer compensation, the adoption of an entity’s profits, in proportionaction plan or the adoption of precautionary measures to its participation in such foreign companies’ capital.ensure quality standard improvements.
InAt the end of 2017,November 2021, after a joint work by Anatel, operators and the Brazilian Federal Revenue Office,Quality Assurance Support Authority to define the objectives, criteria and reference values of indicators, Anatel’s Board of Directors formalized the reference documents that anchor this regulation (the Operational Manual and the Reference Values) and stipulated the entry into force on March 1, 2022. Anatel will also disclose the official indexes, and the quality label (intended to increase competition for quality) in 2023, considering the results of the new indicators monitored in the second half of 2022. Meanwhile, adjustments to the criteria and reference values can be made by Anatel.
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Fraud Detection and Prevention
“Subscription fraud,” which consists of using identification documents or RFB, issued Normative Instruction No. 1,771/2017personal data 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, such as: (i) digital authentication for our sales front-end system; (ii) a strong training program; (iii) maintenance of a list of offenders to prevent fraud; (iv) analysis of the documentation presented; and (v) 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 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 determineidentify circumstances in which our 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 tax treatmentcombined 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 the accounting CPC 47 – Customer Contract Revenue, which tax treatment went into effecttheft or theft of merchandise whether in 2018.transportation or storage.
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 Communication (Ministério dasComunicaçdas Comunicações), or Minicom, former Ministry of Science, Technology, Innovation and Communication (MCTIC). Anatel is responsible for promulgating standardsreviewing and amending all administrative regulation regarding services, completion and customer’s rights related to telecommunications, servicesissuing formal authorizations and regulating the relationship between different operators,performing inspections, 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.
In 1998, a presidential decree approved the first General Plan for Universalization Goals (Plano Geral de Metas de Universalização) (“PGMU”), or PGMU I, creating landline universal service obligations binding on the landline telephony services (Serviço Telefônico Móvel Comutado) (“STFC”), or STFC, concessionaires.applicable only for fixed incumbents. PGMU is reviewed every 5 years, regulating obligations such as public pay phones and telephone services for low income. In December 2018, PGMU IV was published 2 years late 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.
The last universalization plan, formulated by the government, was published in January 2021 considering that fixed telephony concession will end in 2025, was published in January, 2021.2025. The PGMU V, replaces the 4G targets established in PGMU IV with thefor construction of a backhaul in the municipalities that do not yet have an opticala fiber optic connection.
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.
In November 2012, Anatel enacted PGMC 2012, whose goalAnother important set of rules is to encourage competition by creating interconnection obligationsthe Decree No. 9,612/2018, or the Connectivity Plan, which 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 sharingcoverage 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,fixed broadband access network in areas with no available internet access by means of Resolution No. 632/2014, Anatel approvedthis type of infrastructure. It also establishes that the adoption of a single regulation fornetwork implemented from 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 applicablecommitments will be subject to fixed, mobile, broadband and cable TV customers. In 2018, Anatel held a subsidies grant, whichsharing from its entry into operation, except when there 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. In December 2020, Anatel initiated the public consultation 77 in order to review Resolution 632/2014. The public consultation received contributions until April 21, 2021 and new regulation is expected to be approvedappropriate competition in the 2nd half of 2021.
In 2016, Anatel issued certain regulations which are particularlyrespective 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).
In March 2018, the E-Digital Decree (Decree No. 9,319/2018) was published by former MCTIC 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, asmarket. 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.
In 2019, Anatel issued several important regulations that have a significant impact on our operations, particularly Resolution No. 709/2019 which approved the General Numbering Regulation, Resolution No. 710/2019 which approved the allocation of the 2.300 GHz radiofrequency band to the SLP and the Regulation on Conditions of Use of the 2,300 GHz radiofrequency band, Resolution No. 711/2019 which approved the allocation of the 3,500 GHz radiofrequency band and the Regulation on Conditions of Use of the 3,500 GHz radiofrequency band and the Resolution No. 717/2019 which approved the new Regulation on the Quality of Telecommunication Services – RQUAL aiming to reflect more accurately the quality conditions experienced by consumer.
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 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.
Telecommunications Self-regulation System
In September 2019, the main telecommunication 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 on specific website to restrict telemarketing calls from telecommunication operators.
In March 2020, telecommunication operators signed the Telecommunications Self-Regulation System, or SART, and approved two codes: Attendance and Offers. A code regarding billing obligations are still under discussion by the telecommunication operators and SART independent advisors.
Throughout 2020, the Federal Government and Anatel issued other important public consultations and decrees as listed below:
Federal Government
In 2020, several important Decrees were published, of which we highlight: (i) Decree No. 10,222/2020 was published in February and established the National Strategy for Cyber Security (E-Ciber). The E-ciber is the first module of implementation of the National Information Security Policy (Decree 9.367/2018) and contains the main actions intended by the federal government in the area of cyber security from 2020 to 2023; (ii) Decree No. 10,332/2020 which provides for Digital Government Strategy for the period as from 2020 to 2022, by means of use of information and communication by agencies and entities of the direct, autarchic and foundational federal public administration; (iii) Decree No. 10,480/2020 that regulates the Antennas Law (Law No. 13,116/2015) with the objective of stimulating the development of the telecommunications network infrastructure; (iv)infrastructure.
Federal Government
In 2021 there were some important ordinances published, namely: (i) Ministry of Communications Decree No. 10,534/20202,447/2021, which approved our issuance of up to instituteR$5,753 billion in debentures; (ii) Ministry of Communications Decree No. 2,556, which set priorities and goals for the establishment of investments determined by Anatel; (iii) Decree No. 10,748, which established the Federal Network for the Management of Cyber Incidents, regulating the National InnovationInformation Security Policy, withinwhich aims to improve and coordinate the scopebodies and entities of the federal public administration aimingin the prevention, treatment and response to stimulatecyber incidents; (iv) Decree No. 10,887, which provided for the research,organization of the National Consumer Defense System, with the objective of guaranteeing greater protection to consumer relations, increasing legal certainty, and making the administrative process more efficient; and (v) Data Protection Authority Decree No. 15, which established the Governance Committee, responsible for establishing institutional strategies and strategic guidelines related to public governance.
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Also, there were some relevant decrees involving 5G. They were: (i) Decree No. 10,799 which updated Decree No. 9,612/2018 (telecom public policies), allowing the Government’s network to be built by other entities, not only Telebras; (ii) Decree No. 10,800 established the Amazon Integrated and Sustainable Program (PAIS). One of its objectives is to expand telecom networks to the Amazon region, in addition to creating a management committee to monitor them, among other provisions; and (iii) Ministry of Communications Decree No. 1,924/21 about 5G guidelines, mainly about network security; obligation to provide an exclusive government network; backhaul for agribusiness; coverage of federal highways aligned with the Ministry of Infrastructure, among others. In order to use the Universal Telecom Services Fund (FUST), (i.e. the contribution that the telecom sector makes annually), Law No. 14,109/2020 was introduced authorizing the use of FUST, including by the private sector, to expand connectivity in rural or urban areas with a low human development Index (HDI) as well as policies for education and tech innovation of companies, ICT and private non-profit entities with a view to increase the productivity and competitiveness of the economy, the generation of wealth and the good -being social; and (v) Decree No. 10,526/2020 that institutes a Committee for Infrastructure Planning and Long-Term Integrated Infrastructure Plan.
Anatelservices in rural areas.
In 2020, Anatel submitted 78 topicsthe Decree No. 10,480/2020 was published by the federal government, which regulates antennas (Law No. 13,116/2015) with the purpose of stimulating the development of telecommunications network infrastructure. This decree is aimed to foster development of telecommunication network infrastructure and is a major step towards unlocking historical problems in the sector preventing its development, for public consultation. example, some historical problems that the regulation seeks to cure include free right of way on highways and railways, positive silence, small cells and dig once.
On 15 June 2021, Provisional Measure 1,018/2020 was transformed into Law No. 14,173/2021, reducing the charges for satellite internet terrestrial stations and changing some of the FUST application rules.
The main topics were: (i) Public Consultation No. 5 – Resolution Draft approvinglaw reduces FUST collection between 2022 and 2026 for telecommunications operators that run universalization programs approved by the Adaptation Regulationmanagement council (yet to be approved) with their own resources. The benefit will be valid for STFC Concessions; (ii) Public Consultation No. 9 – 5G Auction; (iii) Public Consultation No. 19 – Regulationfive years from 1 January 2022 and will be progressive: 10% in the first year; 25% in the second year; 40% in the third year; and 50% from the fourth year onwards.
In addition, the new legislation removes the obligation to share towers within a distance of Continuityless than 500 metres from each other. The withdrawal of STFC – Reversible Assets; (iv) Public Consultation No. 25 – to collect subsidies on reinforcers / repeaters of signals of SMP; (v) Public Consultation No. 37 – Proposal for Telecommunications Services Numbering Regulation; (vi) Public Consultation No. 48 – White Spaces; (vii) Public Consultation No. 51 – to collect subsidies to revise Regulationsthis obligation was considered essential for the Useimplementation of Radio Spectrum; (viii) Public Consultation5G in Brazil, including to allow for the expected increase in density for the new technology.
In 2022, Decree No. 65 – Simplification10.952/2022 was published, establishing the transfer of regulationR$3.5 billion of FUST collection for connectivity of students and teachers of basic public education and data provided by INEP as criteria for transferring resources. The decree also stipulates that the resources may be used for a fixed connection, provided that cost-effectiveness is proven or that there is no offer of mobile data in the location where the beneficiary students live.
In March 2022 Decree No. 11,004/22 was published, which defines how the Fund will be operationalized and foresees how the resources will be applied to any telecommunications services;service.
Also in 2022, Decree No. 11.304/2022 was published, establishing new rules for the Customer Service (SAC). The new “SAC Decree” brought more flexible rules regarding service hours, provision of protocol and (ix) Public Consultation No. 77 – General Regulation on Consumer Rights (RGC).digital service.
Additionally,Anatel
Over the years, Anatel enactedhas published several important regulationsResolutions that will have a significant impact on our activities, particularly those summarized below:apply obligations to the telecommunications sector, among which we can highlight:
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Resolutions published in 2022
Resolution No. |
Resolution No. |
Resolution No. |
Resolution No. |
Resolution No. |
Resolution No. |
(vii) | Resolution No. 755/2022: this Resolution approved the new Pricing Regulation for the Fixed Service; |
(viii) | Resolution No. 756/2022: this Resolution changes the Regulation for Adaptation of Fixed Service Concessions; |
(ix) | Resolution No. 757/2022: this Resolution approved the new Regulation of Conditions of Use of Radiofrequencies; and |
(x) | Resolution No. 758/2022: this Resolution ensures the Brazil’s commitment to |
Main Public Consultations held in 2022
(i) | Public Consultation No. 17: Revision proposal of the Joint Regulation No. 04/14 approved by ANEEL and Anatel to regulate the use of poles by telecommunication operators; |
(ii) | Public Consultation No. 23: Proposal for an Act for the use of radiofrequency bands between 4,800 and 4,990 MHz; |
(iii) | Public Consultation No. 27: Technical and operational requirements for radio navigation and radiolocation applications; |
(iv) | Public Consultation No. 36: Technical and operational requirements for coexistence and protection of radio altimeters; |
(v) | Public Consultation No. 41: Proposal to simplify the Services Regulation; |
(vi) | Public Consultation No. 48: Proposal of Anatel’s Regulatory Agenda for 2023-204; |
(vii) | Public Consultation No. 54: Proposal to update the Operating Procedure for Assigning Numbering Resources; and |
(viii) | Public Consultation No. 79: Proposal of technical requirements to Automated Frequency Coordination (AFC) in 6 GHz frequency. |
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Telecommunications Self-regulation System
In March 2020, telecommunication operators signed the Telecommunications Self-Regulation System, or SART, which proposes to establish common rules and procedures that must be followed by all participating companies, in relation to the most material topics in the relationship between providers and customers, such as telemarketing (approved in September 2019), offers (approved in March 2020), billing (approved in February 2021) and attendance (approved in March 2020).
Other Agencies
Recently, we also monitored and participated in Public Consultations carried out by Brazil’s national electricity agency, Agência Nacional de Energia Elétrica, or Aneel, on topics related to infrastructure sharing (poles) and distributed generation. The results of the Public Consultations are expected for the years 2023 and 2024.
Review of the Current Regulatory Model for the Provision of Telecommunications Services
In April 11, 2019, PLC 79/2016 the working group composed by MCTICwas approved and Anatel published its final report with a “diagnosis” on the telecommunications industry and proposed guidelines for the revision of the Brazilian regulatory model. A bill of law (PLC 79/2016) was then presented to the National Congress of Brazil to propose amendments to the General Telecommunications Law.
converted into Law No. 13,879 was approved in 2019 and13,879. The Law entered into force on October 4, establishing a new regulatory framework for the telecommunications sector in Brazil, the major regulatory change in 20 years.
The new telecommunications framework allows the fixed telephone concessionaires to adapt their agreements from a concession regime to an authorization regime. This change of concession to authorization must be requested by the concessionaire and it should be approved by the Anatel. In return, concessionaires must, among other conditions, make investment commitments to expand fixed broadband services, in areas without adequate competition for these services in order to minimize gaps and inequalities between Brazilian areas. Additionally, it also changes the rules on authorization of radiofrequency uses, establishing subsequent renewals and allows Radiofrequency trading among players (spectrum secondary market).
In June 2020, the Federal Government published Decree No. 10,402/2020 which regulates Law No 13,879/2019 and provides for the adaptation of the concession instrument to authorization of telecommunications service and on the extension and transfer of radiofrequency authorization, grants of telecommunications service and satellite exploration rights.
Decree No. 10,402/2020 establishes that the partial or full transfer of the authorization to use radio frequencies between telecommunications service providers will be carried out against payment by Anatel and must be preceded by Anatel’s consent, in addition to enabling the maintenance of obligations associated to radiofrequencies (serving the public interest), the application of restrictions of a competitive nature when necessary/convenient and the analysis of tax regularity of the company to which the authorization is being transferred. It also confirmed that the current authorizations are covered by the new rule for successive renewals.
Another important set of rules is the Decree No. 9,612/2018, or the Connectivity Plan, which 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 available internet access by means of 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.
In connection with the conclusion of the Reorganization whereby TIM Celular was merged into the Company (see “Item 4. Information on the Company—C. Organizational Structure”). The Company holdsWe hold all of the authorizations previously issued in the name of other companies controlled, directly or indirectly, by TIM Participações]es.
The following table shows each of our authorizations in effect on December 31, 2020:
Territory | 450 MHz | 800 MHz, 900 MHz and 1800 MHz | Additional Frequencies 1800 MHz | 1900 MHz and 2100 MHz (3G) | 2500 MHz V1 Band (4G) | 2500 MHz P Band** (4G) | 700 MHz |
States of Amapá, Roraima, Pará, Amazonas and Maranhão | – | March 2031* | April 2023 | April 2023 | October 2027 | PA – February 2024* | December 2029 |
States of Rio de Janeiro and Espírito Santo | October 2027 | March 2031* | ES – April 2023– | April 2023 | October 2027 | RJ – February 2024* | December 2029 |
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 | PR – October 2027 | March 2031* | April 2023 | April 2023 | October 2027 | Curitiba – PR July 2031 DF – February 2024* | December 2029 |
State of São Paulo | – | March 2031* | Interior – April 2023– | April 2023 | October 2027 | – | December 2029 |
State of Paraná (except for the cities of Londrina and Tamarana) | October 2027 | September 2022* | April 2023 | April 2023 | October 2027 | AR 41, except Curitiba and Metropolitan Region – February 2024* AR41, Curitiba and Metropolitan Region -July 2031 | December 2029 |
State of Santa Catarina | October 2027 | September 2023* | April 2023 | April 2023 | October 2027 | – | December 2029 |
City of Pelotas and its surrounding region in the State of Rio Grande do Sul | – | April 2024* | – | April 2023 | October 2027 | – | December 2029 |
State of Pernambuco | – | 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 |
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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 |
Obligations of Telecommunications Companies
In 2011, Anatel published Resolution No. 575/11 regardingAmong all the review of the regulationobligations imposed on the management of quality of service – PCS. The new regulation established new quality goals, evaluation criteria, data collection and quality monitoring of servicetelecommunications 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.
In March 2014, by means of Resolution No. 632/2014 has the most significant impact. Pursuant to this resolution, 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 heldThis regulation was subject to a subsidies grant, which is an opinion-gathering tool similar to, but at the preparation stage ofPublic Consultation in 2020 and 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 consultationnew Regulation is expected to be approval in 2020.the first half of 2023.
In December 2019, Anatel approved RQUAL, which is expected to entercame 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 threeMarch 2022. After reviewing certain 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 ableclassified from A-E (expected 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 measurestake place 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.2023). See “—Quality Management Regulation.”
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.”
Since 2018,In recent years, Anatel initiated certain 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. In 2019,On December 31, 2022, the total amount of these fines was R$708.1 million.270.1 million (after adjusting for inflation). However, only R$32.331.2 million (after adjusting for inflation) was classified as “probable loss” by our legal advisors. The significant amount related to fines classified as “possible loss” areis a result of ongoing litigation.
On August 22, 2019, Anatel’s board of officers unanimously approved the execution of a TAC with TIM S.A., effective for 4 years from signature. The agreement covers fines imposed against us in the total amount of R$627639 million. The commitment we assumed, as also approved by our boardBoard of directorsDirectors on June 19, 2020, 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 366350 cities with less than 30 thousand inhabitants thus reaching over 3.4 million people.people and the application of Internal Controls Management to ensure compliance with the closed proposal and the commitment to not impose inspection obstructions. As released to the market in June 16, 2020, and previously approved by Anatel on August 22, 2019, the TAC provided the implementation of the new infrastructure in three years, with our assurance that these areas will be shared with other providers. However, on April 13, 2021, Anatel approved our request to anticipate the deployment of such infrastructure, which is now expected to be concluded in two years.
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. On December 5, 2016, Anatel published public consultations on (i) the revision of PGMC 2012’s relevant markets and remedies,remedies; and (ii) the proposal of a specific Regulation for the Approval of Reference Offers, for public comment until March 22, 2017.
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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;mobile network; and (ii) national roaming; and (iii) 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:
PGMC 2012 | New PGMC | |
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 | * 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. Before coming into force, Anatel started revising these acts and, on February 24, 2020, published the new Acts Nos. 986/2020 and 987/2020.
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.
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Until July 2018, roaming reference values were provided for in Act No. 9,157/2018. After deliberation by Anatel's Board, the new values are now provided for in Act No. 8,822/2022.
In the high-capacity data transport, Anatel’s Board recently approved Act No. 15,944/2022, replacing Act No. 9,161/2018.
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, applyingthat results on a glide path to the reduction of 18% inmobile interconnection rates (VU-M) from 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 publishedto 2018, 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 No. 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 20192021 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 2021.2022. 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.
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. Before coming into force, Anatel started revising these acts and, on February 24, 2020, published the new Acts Nos. 986/2020 and 987/2020.
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, in 2018, it was also reduced to levels of R$0.03, in 2019, it was reduced to levels of R$0.01 and, in 2020, it was reduced to levels of R$0.03. In December 2020, 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.
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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.
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. The LGPD came into effect on September 18, 2020. However, the administrative sanctions provisions of LGPD will only becomebecame enforceable as of August 1, 2021, pursuant to Law No. 14,010/2020. Once the administrative sanctions of the LGPD become enforceable, cybersecurityCybersecurity incidents and data breach or leakage events may subject us to the following penalties: (1) warnings, with the imposition of a deadline for the adoption of corrective measures; (2) a one-time fine of up to 2% of gross sales of the company or a group of companies or a maximum amount of R$50,000,000 per violation; (3) a daily fine, up to a maximum amount of R$50,000,000 per violation; (4) public disclosure of the violation; (5) the restriction of access to the personal data to which the violation relates, until corrective measures are implemented; (6) deletion of the personal data to which the violation relates; (7) partial suspension of the databases to which the violation relates for up to 12 months, until corrective measures are implemented; (8) suspension of the personal data processing activities to which the violation relates for up to 12 months; and (9) partial or full prohibition on personal data processing activities. The postponement of the administrative sanctions doesdid not prevent the competent authorities to begin supervision procedures and enactment of additional rules to be complied with prior to such effectiveness date, nor doesdid it prevent individual or collective lawsuits based on violation of data subject’s rights and subject to civil liability.
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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 lecturestraining for all employees and salesforce as well as customized training 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 the Company).
We requested a renewal of our On March 2016, the 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.were renewed.
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.
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: we, Vivo, Claro and Nextel (now America Movil) acquired blocks of frequencies.
In December 2011, Anatel started auction No. 001/2011-PVCP/SPV, pursuant to whichauctioned 16 blocks in the 1,800 MHz band, which 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. 7.5127,512 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. Then, in 2022, through Act No. 12,827, published on September 13, 2022, the 450 MHz block was extinguished. As indicated in the notice, the winners of the auction committed themselves to the waiver if services were not activated within the established time frame.
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,us, 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).
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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 As of September 2019, all Brazilian municipalities are able to receive TIM’s expanded 4G coverage through 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.band.
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.
In November 2021, TIM acquired 11 lots in the 5G Auction, with a total value offered of R$1.05 billion, in three frequency bands 3.5 GHz, 2.3 GHz and 26 GHz. The acquired bands have a set of obligations that must be met with financial contributions or the construction of mobile and fixed network infrastructure.
Currently, according to Decree No. 10,402/2020, which regulates Law No. 13,879/2019, it is possible to renew licenses for successive periods. However, some conditions are being disputed with Anatel and judicially, such as value and term of renewal.
The actual scenario of frequencies granted to us by Anatel is presented on the tables below:
Territory | Frequencies | |||||||
UF | 450 MHz | 700 MHz | 800 MHz | 900 MHz | 1800 MHz | Additional 1800 MHz | 1900 MHz (3G) | 2100 MHz (3G) |
Acre | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Alagoas | - | December 2029 | December 2023* | December 2023* | December 2023* | - | April 2023 | April 2023 |
Amapá | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Amazonas | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Bahia | - | December 2029 | August 2027* | August 2027* | August 2027* | - | April 2023 | April 2023 |
Ceará | - | December 2029 | November 2028* | November 2023* | December 2032* | - | April 2023 | April 2023 |
Distrito Federal | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Espírito Santo | October 2027 | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Goiás | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Maranhão | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Mato Grosso | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Mato Grosso do Sul | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Minas Gerais *** | - | December 2029 | April 2028* | April 2028* | April 2028* | April 2023 | April 2023 | April 2023 |
Pará | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
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Territory | Frequencies | |||||||
UF | 450 MHz | 700 MHz | 800 MHz | 900 MHz | 1800 MHz | Additional 1800 MHz | 1900 MHz (3G) | 2100 MHz (3G) |
Paraíba | - | December 2029 | November 2028* | December 2023* | November 2032* | - | April 2023 | April 2023 |
Paraná | October 2027 | December 2029 | November 2028* and March 2031* for the cities of Londrina and Tamarana | December 2032* and April 2023* for the cities of Londrina and Tamarana | December 2032* and April 2023* for the cities of Londrina and Tamarana | April 2023 | April 2023 | April 2023 |
Pernambuco | - | December 2029 | November 2028* | May 2024* | December 2032* | - | April 2023 | April 2023 |
Piauí | - | December 2029 | November 2028* | March 2024* | December 2032* | - | April 2023 | April 2023 |
Rio de Janeiro | October 2027 | December 2029 | March 2031* | March 2031* | March 2031* | - | April 2023 | April 2023 |
Rio Grande do Norte | - | December 2029 | November 2028* | December 2023* | December 2032* | - | April 2023 | April 2023 |
Rio Grande do Sul | - | December 2029 | March 2031* and November 2028* city of Pelotas and its surrounding region | March 2031* and April 2024* city of Pelotas and its surrounding region | March 2031* and December 2032* city of Pelotas and its surrounding region | April 2023 | April 2023 | April 2023 |
Rondônia | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Roraima | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Santa Catarina | October 2027 | December 2029 | November 2028* | September 2023* | December 2032* | April 2023 | April 2023 | April 2023 |
São Paulo | - | December 2029 | March 2031* | March 2031* | March 2031* | Interior – April 2023 | April 2023 | April 2023 |
Sergipe | - | December 2029 | August 2027* | August 2027* | August 2027* | - | April 2023 | April 2023 |
Tocantins | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Territory | Frequencies | ||||||
UF | 2300 MHz | 2500 MHz V1 Band (4G) | 2500 MHz P Band** (4G) | 3500 MHz (5G) | 26 GHz (5G) | Additional 26 GHz (5G) | Additional 26 GHz (5G) |
Acre | - | October 2027 | - | December 2041 | December 2031 | - | - |
Alagoas | - | October 2027 | - | December 2041 | December 2031 | - | - |
Amapá | - | October 2027 | - | December 2041 | December 2031 | - | - |
Amazonas | - | October 2027 | - | December 2041 | December 2031 | - | - |
Bahia | - | October 2027 | - | December 2041 | December 2031 | - | - |
Ceará | - | October 2027 | - | December 2041 | December 2031 | - | - |
Distrito Federal | - | October 2027 | February 2024* | December 2041 | December 2031 | - | - |
Espírito Santo | December 2041 | October 2027 | - | December 2041 | December 2031 | December 2031 | December 2041 |
Goiás | - | October 2027 | - | December 2041 | December 2031 | - | - |
Maranhão | - | October 2027 | - | December 2041 | December 2031 | - | - |
Mato Grosso | - | October 2027 | - | December 2041 | December 2031 | - | - |
Mato Grosso do Sul | - | October 2027 | - | December 2041 | December 2031 | - | - |
Minas Gerais *** | December 2041 | October 2027 | February 2030* | December 2041 | December 2031 | December 2031 | December 2041 |
Pará | - | October 2027 | February 2024* | December 2041 | December 2031 | - | - |
Paraíba | - | October 2027 | - | December 2041 | December 2031 | - | - |
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Territory | Frequencies | ||||||
UF | 2300 MHz | 2500 MHz V1 Band (4G) | 2500 MHz P Band** (4G) | 3500 MHz (5G) | 26 GHz (5G) | Additional 26 GHz (5G) | Additional 26 GHz (5G) |
Paraná | December 2041 | October 2027 | July 2031 (city of Curitiba and Metropolitan Region) and February 2024* AR 41, except Curitiba and Metropolitan Region | December 2041 | December 2031 | December 2031 | December 2041 |
Pernambuco | - | October 2027 | July 2031 (city of Recife) | December 2041 | December 2031 | - | - |
Piauí | - | October 2027 | - | December 2041 | December 2031 | - | - |
Rio de Janeiro | December 2041 | October 2027 | February 2024* | December 2041 | December 2031 | December 2031 | December 2041 |
Rio Grande do Norte | - | October 2027 | - | December 2041 | December 2031 | - | - |
Rio Grande do Sul | December 2041 | October 2027 | - | December 2041 | December 2031 | December 2031 | December 2041 |
Rondônia | - | October 2027 | - | December 2041 | December 2031 | - | - |
Roraima | - | October 2027 | - | December 2041 | December 2031 | - | - |
Santa Catarina | December 2041 | October 2027 | - | December 2041 | December 2031 | December 2031 | December 2041 |
São Paulo | - | October 2027 | - | December 2041 | December 2031 | December 2031 (except sector 33) | December 2041 (except sector 33) |
Sergipe | - | October 2027 | - | December 2041 | December 2031 | - | - |
Tocantins | - | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 |
* | Terms already renewed for 15 years. |
** | Only covers complementary areas in the specified states. The Radio frequency Blocks of the Municipalities of the National Code 92, which were part of Lot 208, were returned. |
*** | Except for the cities in sector 3 of PGO for 3G and excess radio frequency. |
Industrial ExplorationRoaming 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 Dedicated Lines
In December 2010, Anatel approved a public hearing that considered alterationsother 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 EILD,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 us, Claro, Oi and Vivo to guarantee the provision of mobile services (voice, SMS and data) in all cities with less than 30,000 inhabitants through roaming agreements.
International Roaming Agreements
We have international roaming agreements available in 210 different countries with 462 international operators that encompass 591 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 2022, we expanded our 4G data coverage to 35 new networks, meaning now we offer 4G roaming in 105 countries, covering the main travel destinations for Brazilians. We have also started offering VoLTE and 5G NSA on roaming; by the end of 2022 we had already established five VoLTE connections in two countries and 26 5G NSA connections in 16 countries.
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In November 2018, Brazil entered into a free trade agreement with Chile, which resulted in the end of international roaming charges between the two countries. In October 13, 2021 the Legislative Decree No. 33/2021, which approved the free trade with Chile, was sanctioned by the President of the Senate. With the approval, the agreement came into force on January 25, 2022, and the end of roaming charges is expected by January 25, 2023. The agreement signed in July 2019 with other Mercosur countries to eliminate international roaming. In January 2023, the operational manual on international roaming services was approved through decision No.2 as established in Article 11.25 of the free trade agreement between Brazil and Chile.
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 Communication (Ministério das Comunicações). Anatel is responsible for reviewing and amending all administrative regulation regarding services, completion and customer’s rights related to telecommunications, issuing formal authorizations and performing inspections, 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.
In 1998, a presidential decree approved the first General Plan for Universalization Goals (Plano Geral de Metas de Universalização) (“PGMU”), obligations binding on the landline telephony services (Serviço Telefônico Móvel Comutado) (“STFC”), applicable only for fixed incumbents. PGMU is reviewed every 5 years, and the last universalization plan, formulated by the government, was published in January 2021 considering that fixed telephony concession will end in 2025. The PGMU V, replaces the 4G targets established in PGMU IV for construction of a backhaul in the municipalities that do not have a fiber optic connection.
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.
Another important set of rules is the Decree No. 9,612/2018, or the Connectivity Plan, which established mechanismsa 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 available internet access by means of 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. As well as Decree No. 10,480/2020 that regulates the Antennas Law (Law No. 13,116/2015) with the objective of stimulating the development of the telecommunications network infrastructure.
Federal Government
In 2021 there were some important ordinances published, namely: (i) Ministry of Communications Decree No. 2,447/2021, which approved our issuance of up to R$5,753 billion in debentures; (ii) Ministry of Communications Decree No. 2,556, which set priorities and goals for the operationestablishment of transmissions circuits upinvestments determined by Anatel; (iii) Decree No. 10,748, which established the Federal Network for the Management of Cyber Incidents, regulating the National Information Security Policy, which aims to 34 Mbpsimprove and coordinate the bodies and entities of the federal public administration in the prevention, treatment and response to cyber incidents; (iv) Decree No. 10,887, which provided for the organization of the National Consumer Defense System, with the objective of guaranteeing greater protection to consumer relations, increasing legal certainty, and making the administrative process more efficient; and (v) Data Protection Authority Decree No. 15, which established the Governance Committee, responsible for establishing institutional strategies and strategic guidelines related to public governance.
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Also, there were some relevant decrees involving 5G. They were: (i) Decree No. 10,799 which updated Decree No. 9,612/2018 (telecom public policies), allowing the Government’s network to be built by other entities, not only Telebras; (ii) Decree No. 10,800 established the Amazon Integrated and Sustainable Program (PAIS). One of its objectives is to expand telecom networks to the Amazon region, in addition to creating a management committee to monitor them, among other provisions; and (iii) Ministry of Communications Decree No. 1,924/21 about 5G guidelines, mainly about network security; obligation to provide an exclusive government network; backhaul for agribusiness; coverage of federal highways aligned with the Ministry of Infrastructure, among others. In order to use the Universal Telecom Services Fund (FUST), (i.e. the contribution that the telecom sector makes annually), Law No. 14,109/2020 was introduced authorizing the use of FUST, including by the private sector, to expand connectivity in rural or urban areas with a low human development Index (HDI) as well as policies for education and tech innovation of services in rural areas.
In 2020, the Decree No. 10,480/2020 was published by the federal government, which regulates antennas (Law No. 13,116/2015) with the purpose of stimulating the development of telecommunications network infrastructure. This decree is aimed to foster development of telecommunication network infrastructure and is a major step towards unlocking historical problems in the sector preventing its development, for example, some historical problems that the regulation seeks to cure include free right of way on highways and railways, positive silence, small cells and dig once.
On 15 June 2021, Provisional Measure 1,018/2020 was transformed into Law No. 14,173/2021, reducing the charges for satellite internet terrestrial stations and changing some of the FUST application rules.
The law reduces FUST collection between 2022 and 2026 for telecommunications operators that run universalization programs approved by the management council (yet to be approved) with their own resources. The benefit will be valid for five years from 1 January 2022 and will be progressive: 10% in the first year; 25% in the second year; 40% in the third year; and 50% from the fourth year onwards.
In addition, the new legislation removes the obligation to share towers within a distance of less than 500 metres from each other. The withdrawal of this obligation was considered essential for the implementation of 5G in Brazil, including to allow for the expected increase transparencyin density for the new technology.
In 2022, Decree No. 10.952/2022 was published, establishing the transfer of R$3.5 billion of FUST collection for connectivity of students and teachers of basic public education and data provided by INEP as criteria for transferring resources. The decree also stipulates that the resources may be used for a fixed connection, provided that cost-effectiveness is proven or that there is no offer of mobile data in the location where the beneficiary students live.
In March 2022 Decree No. 11,004/22 was published, which defines how the Fund will be operationalized and foresees how the resources will be applied to any telecommunications service.
Also in 2022, Decree No. 11.304/2022 was published, establishing new rules for the Customer Service (SAC). The new “SAC Decree” brought more flexible rules regarding service hours, provision of protocol and digital service.
Anatel
Over the years, Anatel has published several Resolutions that apply obligations to the telecommunications sector, among which we can highlight:
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Resolutions published in 2022
(i) | Resolution No. 749/2022: this Resolution approved the Telecommunications Services Numbering Regulation; |
(ii) | Resolution No. 750/2022: this Resolution changes the Telecommunications Services Regulation – RST; |
(iii) | Resolution No. 751/2022: this Resolution amends the applicable regulation for changing procedures related to the inspection of the use of FUST; |
(iv) | Resolution No. 752/2022: this Resolution amends and revokes outdated and conflicting regulatory rules; |
(v) | Resolution No. 753/2022: this Resolution approved the Regulation of the Brazilian Communications Commissions; |
(vi) | Resolution No. 754/2022: this Resolution approved the new Regulation for the Universalization of Fixed Service provided in public regime; |
(vii) | Resolution No. 755/2022: this Resolution approved the new Pricing Regulation for the Fixed Service; |
(viii) | Resolution No. 756/2022: this Resolution changes the Regulation for Adaptation of Fixed Service Concessions; |
(ix) | Resolution No. 757/2022: this Resolution approved the new Regulation of Conditions of Use of Radiofrequencies; and |
(x) | Resolution No. 758/2022: this Resolution ensures the Brazil’s commitment to comply with Mercosur telecommunication regulation. |
Main Public Consultations held in 2022
(i) | Public Consultation No. 17: Revision proposal of the Joint Regulation No. 04/14 approved by ANEEL and Anatel to regulate the use of poles by telecommunication operators; |
(ii) | Public Consultation No. 23: Proposal for an Act for the use of radiofrequency bands between 4,800 and 4,990 MHz; |
(iii) | Public Consultation No. 27: Technical and operational requirements for radio navigation and radiolocation applications; |
(iv) | Public Consultation No. 36: Technical and operational requirements for coexistence and protection of radio altimeters; |
(v) | Public Consultation No. 41: Proposal to simplify the Services Regulation; |
(vi) | Public Consultation No. 48: Proposal of Anatel’s Regulatory Agenda for 2023-204; |
(vii) | Public Consultation No. 54: Proposal to update the Operating Procedure for Assigning Numbering Resources; and |
(viii) | Public Consultation No. 79: Proposal of technical requirements to Automated Frequency Coordination (AFC) in 6 GHz frequency. |
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Telecommunications Self-regulation System
In March 2020, telecommunication operators signed the Telecommunications Self-Regulation System, or SART, which proposes to establish common rules and procedures that must be followed by all participating companies, in relation to the most material topics in the relationship between operatorsproviders and concessionaires. customers, such as telemarketing (approved in September 2019), offers (approved in March 2020), billing (approved in February 2021) and attendance (approved in March 2020).
Other Agencies
Recently, we also monitored and participated in Public Consultations carried out by Brazil’s national electricity agency, Agência Nacional de Energia Elétrica, or Aneel, on topics related to infrastructure sharing (poles) and distributed generation. The results of the Public Consultations are expected for the years 2023 and 2024.
Review of the Current Regulatory Model for the Provision of Telecommunications Services
In May 2012,2019, PLC 79/2016 was approved and converted into Law No. 13,879. The Law entered into force on October 4, establishing a new regulatory framework for the telecommunications sector in Brazil, the major regulatory change in 20 years.
The new telecommunications framework allows the fixed telephone concessionaires to adapt their agreements from a concession regime to an authorization regime. This change of concession to authorization must be requested by the concessionaire and it should be approved by the Anatel. In return, concessionaires must, among other conditions, make investment commitments to expand fixed broadband services, in areas without adequate competition for these services in order to minimize gaps and inequalities between Brazilian areas. Additionally, it also changes the rules on authorization of radiofrequency uses, establishing subsequent renewals and allows Radiofrequency trading among players (spectrum secondary market).
In June 2020, the Federal Government published Decree No. 10,402/2020 which regulates Law No 13,879/2019 and provides for the adaptation of the concession instrument to authorization of telecommunications service and on the extension and transfer of radiofrequency authorization, grants of telecommunications service and satellite exploration rights.
Decree No. 10,402/2020 establishes that the partial or full transfer of the authorization to use radio frequencies between telecommunications service providers will be carried out against payment by Anatel and must be preceded by Anatel’s consent, in addition to enabling the maintenance of obligations associated to radiofrequencies (serving the public interest), the application of restrictions of a competitive nature when necessary/convenient and the analysis of tax regularity of the company to which the authorization is being transferred. It also confirmed that the current authorizations are covered by the new rule for successive renewals.
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.
In connection with the conclusion of the Reorganization whereby TIM Celular was merged into the Company (see “Item 4. Information on the Company—C. Organizational Structure”). We hold all of the authorizations previously issued in the name of other companies controlled, directly or indirectly, by TIM Participações.
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Obligations of Telecommunications Companies
Among all the obligations imposed on telecommunications providers, Resolution No. 632/2014 has the most significant impact. Pursuant to this resolution, 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. This regulation was subject to a Public Consultation in 2020 and a new EILD regulations (Regulação de Exploração Industrial de Linha Dedicada), or REILD, detailing mechanismsRegulation is expected to optimizebe approval in 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,first half of 2023.
In December 2019, Anatel approved new EILD reference prices,RQUAL, which came into force in March 2022. After reviewing certain indicators, operators will be classified from A-E (expected to take place in 2023). See “—Quality Management Regulation.”
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 step towards value fixationconcession 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 controversies between service providers.
Considering that EILD is also a marketDecember 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 asymmetric regulation definedPCS regulations. See “—Authorizations and Concessions.”
In recent years, Anatel initiated certain 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 December 31, 2022, the total amount of these fines was R$270.1 million (after adjusting for inflation). However, only R$31.2 million (after adjusting for inflation) was classified as “probable loss” by our legal advisors. The significant amount related to fines classified as “possible loss” is a result of ongoing litigation.
On August 22, 2019, Anatel’s board of officers unanimously approved the execution of a TAC with TIM S.A., effective for 4 years from signature. The agreement covers fines imposed against us in the total amount of R$639 million. The commitment we assumed, as also approved by our Board of Directors on June 19, 2020, 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 350 cities with less than 30 thousand inhabitants thus reaching over 3.4 million people and the application of Internal Controls Management to ensure compliance with the closed proposal and the commitment to not impose inspection obstructions. As released to the market in June 16, 2020, and previously approved by Anatel on August 22, 2019, the TAC provided the implementation of the new infrastructure in three years, with our assurance that these areas will be shared with other providers.
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, operators classified by Anatel as pertaining to grouppublished a series of regulations identifying groups with significant market power in the EILD market, suchfollowing relevant markets as Oi, were required to submit reference pricesdefined 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 offerslong distance transportation for Anatel’s approval, as well as to only offer EILD throughdata 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 system designedRegulation for the Approval of Reference Offers, for public comment until March 22, 2017.
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In July 2018, Anatel published the New PGMC, 2012.which revised PGMC 2012 and created new markets: (i) mobile network; and (ii) national roaming; and (iii) 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 September 2013, Anatel ratification, foraddition, also based on the first time, reference prices and offers ofproposal submitted to public consultation, wholesale relevant markets will be defined as follows:
PGMC 2012 | New PGMC | |
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 | * towers regulated by law | |
– | Wholesale fixed interconnection | |
– | High capacity data transport |
Under 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 currentlyNew PGMC, TIM has been classified as having significant market power in the EILD market.
Nevertheless,following markets: (i) mobile network termination (otherwise referred to as the TIMmobile 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 still growingmore 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 its backbone now reachingsignificant 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 North regioncost 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 BrazilFebruary 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. Before coming into force, Anatel started revising these acts and, on February 24, 2020, published the new Acts Nos. 986/2020 and 987/2020.
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 using optical fiber technologies and not only via satellite, this has allowed TIMAnatel. We are also required to strengthen and expand theprovide access to our high capacity data transport network due to our classification as having significant market power in that market.
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services offeredUntil July 2018, roaming reference values were provided for in Act No. 9,157/2018. After deliberation by Anatel's Board, the new values are now provided for in Act No. 8,822/2022.
In the high-capacity data transport, Anatel’s Board recently approved Act No. 15,944/2022, replacing Act No. 9,161/2018.
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.
In October 2011, Anatel established a mechanism for reducing fixed-to-mobile call rates, that region, particularlyresults on a glide path to the reduction of mobile interconnection rates (VU-M) from 2012 to 2018, in accordance with Resolution No. 600/2012.
In addition to the statesVU-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 ParáResolution No. 649/2015, the following new B&K percentages, amending the percentages established by Resolution No. 600: 75%/25%, Amapáfrom 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 cityobject of Manaus,a judicial suit (ongoing), in order to suspend its effects. In July 2015, we filed a lawsuit seeking to annul Resolution No. 649/2015 and maintain the capitalpercentages originally established by Resolution No. 600/2012, which currently remains pending a final decision. However, as discussed above, the New PGMC in 2021 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 statetotal traffic exchanged) and will be applied until the next revision of Amazonas and a very important industrial zone.the New PGMC scheduled for 2022. 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.
The greatest benefits ofRelated 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 optical fiber technologytraffic 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 network stabilitythan 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.
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 assurance, greater voiceTU-RL, and data traffic capacityfor EILD. On July 7, 2014, Anatel published the corresponding Acts No. 6,210/2014, 6,211/2014 and 6,212/2014, which determined the higher transmissionspecific reference rates effective as of February 2016.
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, in 2018, it was also reduced to levels of R$0.03, in 2019, it was reduced to levels of R$0.01 and, in 2020, it was reduced to levels of R$0.03. In December 2020, 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 we can now provide to our customers, all of which are essential features to supportsuch amounts do not exceed a specified inflation adjusted cap. Anatel currently uses the increasing telecommunication services demandsindex (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 region.
We have started discussions to applytelecommunications 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 modelmodel. 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.
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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 the existing agreements we have with operators with significant market power in the EILD market. As partmigration between providers of the strategy of reducing operating expenses andsame telecommunications services. For PCS providers, portability can take place when a customer changes its services provider within the same Registration Area as consequencewell as when a customer changes the service plan of the expansion of our optic network infrastructure wesame area. Anatel finished the nationwide NP implementation schedule in March 2009.
Value-Added Services and Internet Regulation
Value-Added Services 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 demonstratednot considered under Brazilian telecommunications regulations to be the most cost effective solution.
Migrationtelecommunications 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 Mobile Networks with Analog Technologytelecommunications service that enables users to navigate the Internet.
In February 2011, Anatel approved ResolutionApril 2014, the Brazilian President passed Law No. 562/11, which modified a provision12,965/2014, known as the Legal Framework for the Use of the regulation on conditions of use of RF, determining that, after a period of 360 days fromInternet (Marco Civil da Internet), or the publication,Internet Framework, which establishes the principles, guarantees, rights and duties for the use of analog technologythe Internet in RF sub bandsBrazil. Key topics covered in the Internet Framework are: net neutrality; collection, use and storage of 800 MHz would no longerpersonal data; confidentiality of communications; freedom of expression and the treatment of illegal, immoral or offensive contents.
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. The LGPD came into effect on September 18, 2020. However, the administrative sanctions provisions of LGPD only became enforceable as of August 1, 2021, pursuant to Law No. 14,010/2020. Cybersecurity incidents and data breach or leakage events may subject us to the following penalties: (1) warnings, with the imposition of a deadline for the adoption of corrective measures; (2) a one-time fine of up to 2% of gross sales of the company or a group of companies or a maximum amount of R$50,000,000 per violation; (3) a daily fine, up to a maximum amount of R$50,000,000 per violation; (4) public disclosure of the violation; (5) the restriction of access to the personal data to which the violation relates, until corrective measures are implemented; (6) deletion of the personal data to which the violation relates; (7) partial suspension of the databases to which the violation relates for up to 12 months, until corrective measures are implemented; (8) suspension of the personal data processing activities to which the violation relates for up to 12 months; and (9) partial or full prohibition on personal data processing activities. The postponement of the administrative sanctions did not prevent the competent authorities to begin supervision procedures and enactment of additional rules to be allowed.complied with prior to such effectiveness date, nor did it prevent individual or collective lawsuits based on violation of data subject’s rights and subject to civil liability.
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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 training for all employees and salesforce as well as customized training 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 relationconnection 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 use of such RF, we no longer have subscribers of analog technology (AMPS)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 the Company). However, our analog networksOn March 2016, the authorizations for the D and E bands were still used by STFC concessionaires to provide services to subscribers in rural areas of the country, through a service called RuralCel.renewed.
In December 2016,2007, we acquired new authorizations for the 1,800 MHz frequency in 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.
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: we, Vivo, Claro and Nextel (now America Movil) acquired blocks of frequencies.
In December 2011, Anatel auctioned 16 blocks in the 1,800 MHz band, which 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.
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. Then, in 2022, through Act No. 12,827, published on September 13, 2022, the 450 MHz block was extinguished. As indicated in the notice, the winners of the auction committed themselves to the waiver if services were not activated within the established time frame.
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 Resolution No. 672/16, which prohibited the usededication of analoga single band, of the 700MHz spectrum, exclusively to mobile services and in September 2014, Anatel concluded the 700 MHz spectrum auction that granted to us, 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).
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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. As of September 2019, all Brazilian municipalities are able to receive TIM’s expanded 4G coverage through the 700 MHz band.
In December 2015, Anatel auctioned remaining radio frequency sub bands of 800 MHz, 900 MHz,frequencies in the 1,800 MHz, 1,900 MHz and 2,100 MHz.2,500 MHz bands. We shut downsubmitted 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 RuralCel service in 2017, and consequently turned off the related radio base stations, as attested to by Oi and recognizedbids which totaled R$57.5 million. The corresponding authorization terms were executed by Anatel in Decision-making No. 6/2017.
Quality Management RegulationJuly 2016.
In October 2011, Anatel published PCS and SCM quality management regulations to establish quality parameters which were to have been met byNovember 2021, TIM acquired 11 lots in 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.
In response to the need to better quantify the financial impacts, Oi submitted a request for cancellation together5G Auction, with a request for review to Anatel for the presentationtotal value offered of technical surveysR$1.05 billion, in three frequency bands 3.5 GHz, 2.3 GHz and 26 GHz. The acquired bands have a set of the economic impacts of the new regulations. The aforementioned request was submitted to public hearing by Anatel, which resulted in a series of divergent opinions regarding the quality measures by the different operations that are being analyzed by Anatel.
With regard to STFC, in December 2012, Anatel approved the Quality Management Regulation for STFC service providers, which aims to create a new quality management model available, such as the Quality for PCS and SCM.
In February 2013, Anatel published the STFC quality management regulations to establish quality parametersobligations that must be met by fixed-line operators within 120 days. All established parameters took effective in June 2013.with financial contributions or the construction of mobile and fixed network infrastructure.
In December 2019, Anatel approved RQUAL, which is expected to come into force in 2022. RQUAL will apply to all telecommunications services (mobile, fixed, fixed broadband and pay TV). In this new model, in addition to the mandatory establishment of an ombudsman, the quality of service is measured based on three indicators (Service Quality Index, Perceived Quality Index and User Complaint Index), classifying operatorsCurrently, according to their performance.Decree No. 10,402/2020, which regulates Law No. 13,879/2019, it is possible to renew licenses for successive periods. However, some conditions are being disputed with Anatel may adopt remedial measures on a case-by-case basis,and judicially, such as compensationvalue and term of renewal.
The actual scenario of frequencies granted to the consumer (basedus by Anatel is presented on the user's compensation model), adoption of an action plan or adoption of precautionary measures to ensure the improvement of quality standards. The new regulation also gives customers additional rights, including the possibility for the customer to terminate their service contract without penalty in the event of poor service quality. The forecast is that the new regulation will come into force in 2022. Until the work group formed by Anatel,tables below:
Territory | Frequencies | |||||||
UF | 450 MHz | 700 MHz | 800 MHz | 900 MHz | 1800 MHz | Additional 1800 MHz | 1900 MHz (3G) | 2100 MHz (3G) |
Acre | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Alagoas | - | December 2029 | December 2023* | December 2023* | December 2023* | - | April 2023 | April 2023 |
Amapá | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Amazonas | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Bahia | - | December 2029 | August 2027* | August 2027* | August 2027* | - | April 2023 | April 2023 |
Ceará | - | December 2029 | November 2028* | November 2023* | December 2032* | - | April 2023 | April 2023 |
Distrito Federal | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Espírito Santo | October 2027 | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Goiás | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Maranhão | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Mato Grosso | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Mato Grosso do Sul | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Minas Gerais *** | - | December 2029 | April 2028* | April 2028* | April 2028* | April 2023 | April 2023 | April 2023 |
Pará | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
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operators and ESAQ (Support Entity and Quality Measurement), define the goals, criteria and reference values for control measures of quality and remediation, Anatel will monitor indicators that are similar to those established in RQUAL.
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.
We are also required to disclose our affiliates’ activities relating to Iran and Syria. The Company 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.
Company’s activities relating to Iran, Syria, Sudan and North Korea
The Company 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 had in the year ended December 31, 2020 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:
Territory | Frequencies | |||||||
UF | 450 MHz | 700 MHz | 800 MHz | 900 MHz | 1800 MHz | Additional 1800 MHz | 1900 MHz (3G) | 2100 MHz (3G) |
Paraíba | - | December 2029 | November 2028* | December 2023* | November 2032* | - | April 2023 | April 2023 |
Paraná | October 2027 | December 2029 | November 2028* and March 2031* for the cities of Londrina and Tamarana | December 2032* and April 2023* for the cities of Londrina and Tamarana | December 2032* and April 2023* for the cities of Londrina and Tamarana | April 2023 | April 2023 | April 2023 |
Pernambuco | - | December 2029 | November 2028* | May 2024* | December 2032* | - | April 2023 | April 2023 |
Piauí | - | December 2029 | November 2028* | March 2024* | December 2032* | - | April 2023 | April 2023 |
Rio de Janeiro | October 2027 | December 2029 | March 2031* | March 2031* | March 2031* | - | April 2023 | April 2023 |
Rio Grande do Norte | - | December 2029 | November 2028* | December 2023* | December 2032* | - | April 2023 | April 2023 |
Rio Grande do Sul | - | December 2029 | March 2031* and November 2028* city of Pelotas and its surrounding region | March 2031* and April 2024* city of Pelotas and its surrounding region | March 2031* and December 2032* city of Pelotas and its surrounding region | April 2023 | April 2023 | April 2023 |
Rondônia | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Roraima | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Santa Catarina | October 2027 | December 2029 | November 2028* | September 2023* | December 2032* | April 2023 | April 2023 | April 2023 |
São Paulo | - | December 2029 | March 2031* | March 2031* | March 2031* | Interior – April 2023 | April 2023 | April 2023 |
Sergipe | - | December 2029 | August 2027* | August 2027* | August 2027* | - | April 2023 | April 2023 |
Tocantins | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Territory | Frequencies | ||||||
UF | 2300 MHz | 2500 MHz V1 Band (4G) | 2500 MHz P Band** (4G) | 3500 MHz (5G) | 26 GHz (5G) | Additional 26 GHz (5G) | Additional 26 GHz (5G) |
Acre | - | December 2041 | December 2031 | - | - |
Alagoas | - | December 2041 | December 2031 | - | - | ||
Amapá | - | October 2027 | - | December 2041 | December 2031 | - | - |
Amazonas | - | October 2027 | - | December 2041 | December 2031 | - | - |
Bahia | - | October 2027 | - | December 2041 | December 2031 | - | - |
Ceará | - | October 2027 | - | December 2041 | December 2031 | - | - |
Distrito Federal | - | October 2027 | February 2024* | December 2041 | December 2031 | - | - |
Espírito Santo | December 2041 | October 2027 | - | December 2041 | December 2031 | December 2031 | December 2041 |
Goiás | - | October 2027 | - | December 2041 | December 2031 | - | - |
Maranhão | - | October 2027 | - | December 2041 | December 2031 | - | - |
Mato Grosso | - | October 2027 | - | December 2041 | December 2031 | - | - |
Mato Grosso do Sul | - | October 2027 | - | December 2041 | December 2031 | - | - |
Minas Gerais *** | December 2041 | October 2027 | February 2030* | December 2041 | December 2031 | December 2031 | December 2041 |
Pará | - | October 2027 | February 2024* | December 2041 | December 2031 | - | - |
Paraíba | - | October 2027 | - | December 2041 | December 2031 | - | - |
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The impact on our consolidated income statement arising from Roaming Agreements with networks of the Designated Countries is detailed as follows:
Year ended December 31, 2020 | ||
Revenues | Charges | |
(thousands of reais) | ||
North Korea | — | — |
Iran | 1 | 1 |
Sudan | 3 | — |
Syria | 1 | 6 |
Total | 4 | 6 |
Territory | Frequencies | ||||||
UF | 2300 MHz | 2500 MHz V1 Band (4G) | 2500 MHz P Band** (4G) | 3500 MHz (5G) | 26 GHz (5G) | Additional 26 GHz (5G) | Additional 26 GHz (5G) |
Paraná | December 2041 | October 2027 | July 2031 (city of Curitiba and Metropolitan Region) and February 2024* AR 41, except Curitiba and Metropolitan Region | December 2041 | December 2031 | December 2031 | December 2041 |
Pernambuco | - | October 2027 | July 2031 (city of Recife) | December 2041 | December 2031 | - | - |
Piauí | - | October 2027 | - | December 2041 | December 2031 | - | - |
Rio de Janeiro | December 2041 | October 2027 | February 2024* | December 2041 | December 2031 | December 2031 | December 2041 |
Rio Grande do Norte | - | October 2027 | - | December 2041 | December 2031 | - | - |
Rio Grande do Sul | December 2041 | October 2027 | - | December 2041 | December 2031 | December 2031 | December 2041 |
Rondônia | - | October 2027 | - | December 2041 | December 2031 | - | - |
Roraima | - | October 2027 | - | December 2041 | December 2031 | - | - |
Santa Catarina | December 2041 | October 2027 | - | December 2041 | December 2031 | December 2031 | December 2041 |
São Paulo | - | October 2027 | - | December 2041 | December 2031 | December 2031 (except sector 33) | December 2041 (except sector 33) |
Sergipe | - | October 2027 | - | December 2041 | December 2031 | - | - |
Tocantins | - | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 |
* | Terms already renewed for 15 years. |
** | Only covers complementary areas in the specified states. The Radio frequency Blocks of the Municipalities of the National Code 92, which were part of Lot 208, were returned. |
*** | Except for the cities in sector 3 of PGO for 3G and excess radio frequency. |
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, 2020 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, 2020 that, to its knowledge, relate in any way to the Designated Countries are:
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 us, Claro, Oi and Vivo to guarantee the provision of mobile services (voice, SMS and data) in all cities with less than 30,000 inhabitants through roaming agreements.
International Roaming Agreements
We have international roaming agreements available in 210 different countries with 462 international operators that encompass 591 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 2022, we expanded our 4G data coverage to 35 new networks, meaning now we offer 4G roaming in 105 countries, covering the main travel destinations for Brazilians. We have also started offering VoLTE and 5G NSA on roaming; by the end of 2022 we had already established five VoLTE connections in two countries and 26 5G NSA connections in 16 countries.
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In November 2018, Brazil entered into a free trade agreement with Chile, which resulted in the end of international roaming charges between the two countries. In October 13, 2021 the Legislative Decree No. 33/2021, which approved the free trade with Chile, was sanctioned by the President of the Senate. With the approval, the agreement came into force on January 25, 2022, and the end of roaming charges is expected by January 25, 2023. The agreement signed in July 2019 with other Mercosur countries to eliminate international roaming. In January 2023, the operational manual on international roaming services was approved through decision No.2 as established in Article 11.25 of the free trade agreement between Brazil and Chile.
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 Communication (Ministério das Comunicações). Anatel is responsible for reviewing and amending all administrative regulation regarding services, completion and customer’s rights related to telecommunications, issuing formal authorizations and performing inspections, 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.
In 1998, a presidential decree approved the first General Plan for Universalization Goals (Plano Geral de Metas de Universalização) (“PGMU”), obligations binding on the landline telephony services (Serviço Telefônico Móvel Comutado) (“STFC”), applicable only for fixed incumbents. PGMU is reviewed every 5 years, and the last universalization plan, formulated by the government, was published in January 2021 considering that fixed telephony concession will end in 2025. The PGMU V, replaces the 4G targets established in PGMU IV for construction of a backhaul in the municipalities that do not have a fiber optic connection.
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.
Another important set of rules is the Decree No. 9,612/2018, or the Connectivity Plan, which 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 available internet access by means of 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. As well as Decree No. 10,480/2020 that regulates the Antennas Law (Law No. 13,116/2015) with the objective of stimulating the development of the telecommunications network infrastructure.
Federal Government
In 2021 there were some important ordinances published, namely: (i) Ministry of Communications Decree No. 2,447/2021, which approved our issuance of up to R$5,753 billion in debentures; (ii) Ministry of Communications Decree No. 2,556, which set priorities and goals for the establishment of investments determined by Anatel; (iii) Decree No. 10,748, which established the Federal Network for the Management of Cyber Incidents, regulating the National Information Security Policy, which aims to improve and coordinate the bodies and entities of the federal public administration in the prevention, treatment and response to cyber incidents; (iv) Decree No. 10,887, which provided for the organization of the National Consumer Defense System, with the objective of guaranteeing greater protection to consumer relations, increasing legal certainty, and making the administrative process more efficient; and (v) Data Protection Authority Decree No. 15, which established the Governance Committee, responsible for establishing institutional strategies and strategic guidelines related to public governance.
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Also, there were some relevant decrees involving 5G. They were: (i) Decree No. 10,799 which updated Decree No. 9,612/2018 (telecom public policies), allowing the Government’s network to be built by other entities, not only Telebras; (ii) Decree No. 10,800 established the Amazon Integrated and Sustainable Program (PAIS). One of its objectives is to expand telecom networks to the Amazon region, in addition to creating a management committee to monitor them, among other provisions; and (iii) Ministry of Communications Decree No. 1,924/21 about 5G guidelines, mainly about network security; obligation to provide an exclusive government network; backhaul for agribusiness; coverage of federal highways aligned with the Ministry of Infrastructure, among others. In order to use the Universal Telecom Services Fund (FUST), (i.e. the contribution that the telecom sector makes annually), Law No. 14,109/2020 was introduced authorizing the use of FUST, including by the private sector, to expand connectivity in rural or urban areas with a low human development Index (HDI) as well as policies for education and tech innovation of services in rural areas.
In 2020, the Decree No. 10,480/2020 was published by the federal government, which regulates antennas (Law No. 13,116/2015) with the purpose of stimulating the development of telecommunications network infrastructure. This decree is aimed to foster development of telecommunication network infrastructure and is a major step towards unlocking historical problems in the sector preventing its development, for example, some historical problems that the regulation seeks to cure include free right of way on highways and railways, positive silence, small cells and dig once.
On 15 June 2021, Provisional Measure 1,018/2020 was transformed into Law No. 14,173/2021, reducing the charges for satellite internet terrestrial stations and changing some of the FUST application rules.
The law reduces FUST collection between 2022 and 2026 for telecommunications operators that run universalization programs approved by the management council (yet to be approved) with their own resources. The benefit will be valid for five years from 1 January 2022 and will be progressive: 10% in the first year; 25% in the second year; 40% in the third year; and 50% from the fourth year onwards.
In addition, the new legislation removes the obligation to share towers within a distance of less than 500 metres from each other. The withdrawal of this obligation was considered essential for the implementation of 5G in Brazil, including to allow for the expected increase in density for the new technology.
In 2022, Decree No. 10.952/2022 was published, establishing the transfer of R$3.5 billion of FUST collection for connectivity of students and teachers of basic public education and data provided by INEP as criteria for transferring resources. The decree also stipulates that the resources may be used for a fixed connection, provided that cost-effectiveness is proven or that there is no offer of mobile data in the location where the beneficiary students live.
In March 2022 Decree No. 11,004/22 was published, which defines how the Fund will be operationalized and foresees how the resources will be applied to any telecommunications service.
Also in 2022, Decree No. 11.304/2022 was published, establishing new rules for the Customer Service (SAC). The new “SAC Decree” brought more flexible rules regarding service hours, provision of protocol and digital service.
Anatel
Over the years, Anatel has published several Resolutions that apply obligations to the telecommunications sector, among which we can highlight:
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Resolutions published in 2022
(i) | Resolution No. 749/2022: this Resolution approved the Telecommunications Services Numbering Regulation; |
(ii) | Resolution No. 750/2022: this Resolution changes the Telecommunications Services Regulation – RST; |
(iii) | Resolution No. 751/2022: this Resolution amends the applicable regulation for changing procedures related to the inspection of the use of FUST; |
(iv) | Resolution No. 752/2022: this Resolution amends and revokes outdated and conflicting regulatory rules; |
(v) | Resolution No. 753/2022: this Resolution approved the Regulation of the Brazilian Communications Commissions; |
(vi) | Resolution No. 754/2022: this Resolution approved the new Regulation for the Universalization of Fixed Service provided in public regime; |
(vii) | Resolution No. 755/2022: this Resolution approved the new Pricing Regulation for the Fixed Service; |
(viii) | Resolution No. 756/2022: this Resolution changes the Regulation for Adaptation of Fixed Service Concessions; |
(ix) | Resolution No. 757/2022: this Resolution approved the new Regulation of Conditions of Use of Radiofrequencies; and |
(x) | Resolution No. 758/2022: this Resolution ensures the Brazil’s commitment to comply with Mercosur telecommunication regulation. |
Main Public Consultations held in 2022
(i) | Public Consultation No. 17: Revision proposal of the Joint Regulation No. 04/14 approved by ANEEL and Anatel to regulate the use of poles by telecommunication operators; |
(ii) | Public Consultation No. 23: Proposal for an Act for the use of radiofrequency bands between 4,800 and 4,990 MHz; |
(iii) | Public Consultation No. 27: Technical and operational requirements for radio navigation and radiolocation applications; |
(iv) | Public Consultation No. 36: Technical and operational requirements for coexistence and protection of radio altimeters; |
(v) | Public Consultation No. 41: Proposal to simplify the Services Regulation; |
(vi) | Public Consultation No. 48: Proposal of Anatel’s Regulatory Agenda for 2023-204; |
(vii) | Public Consultation No. 54: Proposal to update the Operating Procedure for Assigning Numbering Resources; and |
(viii) | Public Consultation No. 79: Proposal of technical requirements to Automated Frequency Coordination (AFC) in 6 GHz frequency. |
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Telecommunications Self-regulation System
In March 2020, telecommunication operators signed the Telecommunications Self-Regulation System, or SART, which proposes to establish common rules and procedures that must be followed by all participating companies, in relation to the most material topics in the relationship between providers and customers, such as telemarketing (approved in September 2019), offers (approved in March 2020), billing (approved in February 2021) and attendance (approved in March 2020).
Other Agencies
Recently, we also monitored and participated in Public Consultations carried out by Brazil’s national electricity agency, Agência Nacional de Energia Elétrica, or Aneel, on topics related to infrastructure sharing (poles) and distributed generation. The results of the Public Consultations are expected for the years 2023 and 2024.
Review of the Current Regulatory Model for the Provision of Telecommunications Services
In 2019, PLC 79/2016 was approved and converted into Law No. 13,879. The Law entered into force on October 4, establishing a new regulatory framework for the telecommunications sector in Brazil, the major regulatory change in 20 years.
The new telecommunications framework allows the fixed telephone concessionaires to adapt their agreements from a concession regime to an authorization regime. This change of concession to authorization must be requested by the concessionaire and it should be approved by the Anatel. In return, concessionaires must, among other conditions, make investment commitments to expand fixed broadband services, in areas without adequate competition for these services in order to minimize gaps and inequalities between Brazilian areas. Additionally, it also changes the rules on authorization of radiofrequency uses, establishing subsequent renewals and allows Radiofrequency trading among players (spectrum secondary market).
In June 2020, the Federal Government published Decree No. 10,402/2020 which regulates Law No 13,879/2019 and provides for the adaptation of the concession instrument to authorization of telecommunications service and on the extension and transfer of radiofrequency authorization, grants of telecommunications service and satellite exploration rights.
Decree No. 10,402/2020 establishes that the partial or full transfer of the authorization to use radio frequencies between telecommunications service providers will be carried out against payment by Anatel and must be preceded by Anatel’s consent, in addition to enabling the maintenance of obligations associated to radiofrequencies (serving the public interest), the application of restrictions of a competitive nature when necessary/convenient and the analysis of tax regularity of the company to which the authorization is being transferred. It also confirmed that the current authorizations are covered by the new rule for successive renewals.
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.
In connection with the conclusion of the Reorganization whereby TIM Celular was merged into the Company (see “Item 4. Information on the Company—C. Organizational Structure”). We hold all of the authorizations previously issued in the name of other companies controlled, directly or indirectly, by TIM Participações.
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Obligations of Telecommunications Companies
Among all the obligations imposed on telecommunications providers, Resolution No. 632/2014 has the most significant impact. Pursuant to this resolution, 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. This regulation was subject to a Public Consultation in 2020 and a new Regulation is expected to be approval in the first half of 2023.
In December 2019, Anatel approved RQUAL, which came into force in March 2022. After reviewing certain indicators, operators will be classified from A-E (expected to take place in 2023). See “—Quality Management Regulation.”
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 recent years, Anatel initiated certain 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 December 31, 2022, the total amount of these fines was R$270.1 million (after adjusting for inflation). However, only R$31.2 million (after adjusting for inflation) was classified as “probable loss” by our legal advisors. The significant amount related to fines classified as “possible loss” is a result of ongoing litigation.
On August 22, 2019, Anatel’s board of officers unanimously approved the execution of a TAC with TIM S.A., effective for 4 years from signature. The agreement covers fines imposed against us in the total amount of R$639 million. The commitment we assumed, as also approved by our Board of Directors on June 19, 2020, 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 350 cities with less than 30 thousand inhabitants thus reaching over 3.4 million people and the application of Internal Controls Management to ensure compliance with the closed proposal and the commitment to not impose inspection obstructions. As released to the market in June 16, 2020, and previously approved by Anatel on August 22, 2019, the TAC provided the implementation of the new infrastructure in three years, with our assurance that these areas will be shared with other providers.
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.
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In July 2018, Anatel published the New PGMC, which revised PGMC 2012 and created new markets: (i) mobile network; and (ii) national roaming; and (iii) 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:
PGMC 2012 | New PGMC | |
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 | * 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. Before coming into force, Anatel started revising these acts and, on February 24, 2020, published the new Acts Nos. 986/2020 and 987/2020.
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.
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Until July 2018, roaming reference values were provided for in Act No. 9,157/2018. After deliberation by Anatel's Board, the new values are now provided for in Act No. 8,822/2022.
In the high-capacity data transport, Anatel’s Board recently approved Act No. 15,944/2022, replacing Act No. 9,161/2018.
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.
In October 2011, Anatel established a mechanism for reducing fixed-to-mobile call rates, that results on a glide path to the reduction of mobile interconnection rates (VU-M) from 2012 to 2018, 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 No. 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. 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 2021 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 2022. 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.
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. 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 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, in 2018, it was also reduced to levels of R$0.03, in 2019, it was reduced to levels of R$0.01 and, in 2020, it was reduced to levels of R$0.03. In December 2020, 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.
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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.
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. The LGPD came into effect on September 18, 2020. However, the administrative sanctions provisions of LGPD only became enforceable as of August 1, 2021, pursuant to Law No. 14,010/2020. Cybersecurity incidents and data breach or leakage events may subject us to the following penalties: (1) warnings, with the imposition of a deadline for the adoption of corrective measures; (2) a one-time fine of up to 2% of gross sales of the company or a group of companies or a maximum amount of R$50,000,000 per violation; (3) a daily fine, up to a maximum amount of R$50,000,000 per violation; (4) public disclosure of the violation; (5) the restriction of access to the personal data to which the violation relates, until corrective measures are implemented; (6) deletion of the personal data to which the violation relates; (7) partial suspension of the databases to which the violation relates for up to 12 months, until corrective measures are implemented; (8) suspension of the personal data processing activities to which the violation relates for up to 12 months; and (9) partial or full prohibition on personal data processing activities. The postponement of the administrative sanctions did not prevent the competent authorities to begin supervision procedures and enactment of additional rules to be complied with prior to such effectiveness date, nor did it prevent individual or collective lawsuits based on violation of data subject’s rights and subject to civil liability.
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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 training for all employees and salesforce as well as customized training 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 the Company). On March 2016, the authorizations for the D and E bands were renewed.
In December 2007, we acquired new authorizations for the 1,800 MHz frequency in 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.
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: we, Vivo, Claro and Nextel (now America Movil) acquired blocks of frequencies.
In December 2011, Anatel auctioned 16 blocks in the 1,800 MHz band, which 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.
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. Then, in 2022, through Act No. 12,827, published on September 13, 2022, the 450 MHz block was extinguished. As indicated in the notice, the winners of the auction committed themselves to the waiver if services were not activated within the established time frame.
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 us, 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).
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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. As of September 2019, all Brazilian municipalities are able to receive TIM’s expanded 4G coverage through the 700 MHz band.
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.
In November 2021, TIM acquired 11 lots in the 5G Auction, with a total value offered of R$1.05 billion, in three frequency bands 3.5 GHz, 2.3 GHz and 26 GHz. The acquired bands have a set of obligations that must be met with financial contributions or the construction of mobile and fixed network infrastructure.
Currently, according to Decree No. 10,402/2020, which regulates Law No. 13,879/2019, it is possible to renew licenses for successive periods. However, some conditions are being disputed with Anatel and judicially, such as value and term of renewal.
The actual scenario of frequencies granted to us by Anatel is presented on the tables below:
Territory | Frequencies | |||||||
UF | 450 MHz | 700 MHz | 800 MHz | 900 MHz | 1800 MHz | Additional 1800 MHz | 1900 MHz (3G) | 2100 MHz (3G) |
Acre | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Alagoas | - | December 2029 | December 2023* | December 2023* | December 2023* | - | April 2023 | April 2023 |
Amapá | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Amazonas | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Bahia | - | December 2029 | August 2027* | August 2027* | August 2027* | - | April 2023 | April 2023 |
Ceará | - | December 2029 | November 2028* | November 2023* | December 2032* | - | April 2023 | April 2023 |
Distrito Federal | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Espírito Santo | October 2027 | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Goiás | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Maranhão | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Mato Grosso | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Mato Grosso do Sul | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Minas Gerais *** | - | December 2029 | April 2028* | April 2028* | April 2028* | April 2023 | April 2023 | April 2023 |
Pará | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
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Territory | Frequencies | |||||||
UF | 450 MHz | 700 MHz | 800 MHz | 900 MHz | 1800 MHz | Additional 1800 MHz | 1900 MHz (3G) | 2100 MHz (3G) |
Paraíba | - | December 2029 | November 2028* | December 2023* | November 2032* | - | April 2023 | April 2023 |
Paraná | October 2027 | December 2029 | November 2028* and March 2031* for the cities of Londrina and Tamarana | December 2032* and April 2023* for the cities of Londrina and Tamarana | December 2032* and April 2023* for the cities of Londrina and Tamarana | April 2023 | April 2023 | April 2023 |
Pernambuco | - | December 2029 | November 2028* | May 2024* | December 2032* | - | April 2023 | April 2023 |
Piauí | - | December 2029 | November 2028* | March 2024* | December 2032* | - | April 2023 | April 2023 |
Rio de Janeiro | October 2027 | December 2029 | March 2031* | March 2031* | March 2031* | - | April 2023 | April 2023 |
Rio Grande do Norte | - | December 2029 | November 2028* | December 2023* | December 2032* | - | April 2023 | April 2023 |
Rio Grande do Sul | - | December 2029 | March 2031* and November 2028* city of Pelotas and its surrounding region | March 2031* and April 2024* city of Pelotas and its surrounding region | March 2031* and December 2032* city of Pelotas and its surrounding region | April 2023 | April 2023 | April 2023 |
Rondônia | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Roraima | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Santa Catarina | October 2027 | December 2029 | November 2028* | September 2023* | December 2032* | April 2023 | April 2023 | April 2023 |
São Paulo | - | December 2029 | March 2031* | March 2031* | March 2031* | Interior – April 2023 | April 2023 | April 2023 |
Sergipe | - | December 2029 | August 2027* | August 2027* | August 2027* | - | April 2023 | April 2023 |
Tocantins | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 | April 2023 | April 2023 |
Territory | Frequencies | ||||||
UF | 2300 MHz | 2500 MHz V1 Band (4G) | 2500 MHz P Band** (4G) | 3500 MHz (5G) | 26 GHz (5G) | Additional 26 GHz (5G) | Additional 26 GHz (5G) |
Acre | - | October 2027 | - | December 2041 | December 2031 | - | - |
Alagoas | - | October 2027 | - | December 2041 | December 2031 | - | - |
Amapá | - | October 2027 | - | December 2041 | December 2031 | - | - |
Amazonas | - | October 2027 | - | December 2041 | December 2031 | - | - |
Bahia | - | October 2027 | - | December 2041 | December 2031 | - | - |
Ceará | - | October 2027 | - | December 2041 | December 2031 | - | - |
Distrito Federal | - | October 2027 | February 2024* | December 2041 | December 2031 | - | - |
Espírito Santo | December 2041 | October 2027 | - | December 2041 | December 2031 | December 2031 | December 2041 |
Goiás | - | October 2027 | - | December 2041 | December 2031 | - | - |
Maranhão | - | October 2027 | - | December 2041 | December 2031 | - | - |
Mato Grosso | - | October 2027 | - | December 2041 | December 2031 | - | - |
Mato Grosso do Sul | - | October 2027 | - | December 2041 | December 2031 | - | - |
Minas Gerais *** | December 2041 | October 2027 | February 2030* | December 2041 | December 2031 | December 2031 | December 2041 |
Pará | - | October 2027 | February 2024* | December 2041 | December 2031 | - | - |
Paraíba | - | October 2027 | - | December 2041 | December 2031 | - | - |
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Territory | Frequencies | ||||||
UF | 2300 MHz | 2500 MHz V1 Band (4G) | 2500 MHz P Band** (4G) | 3500 MHz (5G) | 26 GHz (5G) | Additional 26 GHz (5G) | Additional 26 GHz (5G) |
Paraná | December 2041 | October 2027 | July 2031 (city of Curitiba and Metropolitan Region) and February 2024* AR 41, except Curitiba and Metropolitan Region | December 2041 | December 2031 | December 2031 | December 2041 |
Pernambuco | - | October 2027 | July 2031 (city of Recife) | December 2041 | December 2031 | - | - |
Piauí | - | October 2027 | - | December 2041 | December 2031 | - | - |
Rio de Janeiro | December 2041 | October 2027 | February 2024* | December 2041 | December 2031 | December 2031 | December 2041 |
Rio Grande do Norte | - | October 2027 | - | December 2041 | December 2031 | - | - |
Rio Grande do Sul | December 2041 | October 2027 | - | December 2041 | December 2031 | December 2031 | December 2041 |
Rondônia | - | October 2027 | - | December 2041 | December 2031 | - | - |
Roraima | - | October 2027 | - | December 2041 | December 2031 | - | - |
Santa Catarina | December 2041 | October 2027 | - | December 2041 | December 2031 | December 2031 | December 2041 |
São Paulo | - | October 2027 | - | December 2041 | December 2031 | December 2031 (except sector 33) | December 2041 (except sector 33) |
Sergipe | - | October 2027 | - | December 2041 | December 2031 | - | - |
Tocantins | - | - | December 2029 | March 2031* | March 2031* | March 2031* | April 2023 |
* | Terms already renewed for 15 years. |
** | Only covers complementary areas in the specified states. The Radio frequency Blocks of the Municipalities of the National Code 92, which were part of Lot 208, were returned. |
*** | Except for the cities in sector 3 of PGO for 3G and excess radio frequency. |
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. In addition to these perspectives, we contribute to reduce social disparities, offering the same technology to our customers, as well as content residing locally in our data centers, making no difference to the technical architecture built in a big metropolitan centers.
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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. 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.
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.
In response to the need to better quantify the financial impacts, Oi submitted a request for cancellation together with a request for review to Anatel for the presentation of technical surveys of the economic impacts of the new regulations. The aforementioned request was submitted to public hearing by Anatel, which resulted in a series of divergent opinions regarding the quality measures by the different operations that are being analyzed by Anatel.
With regard to STFC, in December 2012, Anatel approved the Quality Management Regulation for STFC service providers, which aims to create a new quality management model available, such as the Quality for PCS and SCM.
In February 2013, Anatel published the STFC quality management regulations to establish quality parameters that must be met by fixed-line operators within 120 days. All established parameters took effective in June 2013.
In December 2019, Anatel approved the new Telecommunication Services Quality Regulation (“RQUAL”) based on a reactive regulation. In this new model, quality is measured on the basis of three main indicators – a Service Quality Index, a Perceived Quality Index and a User Complaints Index – and operators are classified into five categories (A to E). Based on this regulation, Anatel will be able to take measures according to specific cases, such as consumer compensation, the adoption of an action plan or the adoption of precautionary measures to ensure quality standard improvements.
At the end of November 2021, after a joint work by Anatel, operators and the Quality Assurance Support Authority to define the objectives, criteria and reference values of indicators, Anatel’s Board of Directors formalized the reference documents that anchor this regulation (the Operational Manual and the Reference Values) and stipulated the entry into force on March 1, 2022. Anatel will also disclose the official indexes, and the quality label (intended to increase competition for quality) in 2023, considering the results of the new indicators monitored in the second half of 2022. Meanwhile, adjustments to the criteria and reference values can be made by Anatel.
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Fraud Detection and Prevention
“Subscription fraud,” which consists of using identification documents or personal data 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, such as: (i) digital authentication for our sales front-end system; (ii) a strong training program; (iii) maintenance of a list of offenders to prevent fraud; (iv) analysis of the documentation presented; and (v) 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 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 our 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.
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.
· | 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) (“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. Currently, the ICMS tax rate for domestic telecommunications services is levied at rates between 17% and 29%. The ICMS tax rate levied on the sale of mobile handsets and other products such as modem and SIM cards averages between 17% and 22%. 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 (but not all) 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%. |
· | 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 non-cumulative tax, raising the rate to 7.6% for most transactions. However, telecommunications services revenues, among others, continued 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 our operational activities). In December 2022, Decree No. 11,322/22 reduced by half the PIS and Cofins rates levied on financial income earned by companies subject to the non-cumulative regime. The COFINS rates changed from 4% to 2%. According to the Decree, the reduction would take effect from January 1, 2023. However, on January 2, 2023, it was revoked by the newly elected Government, reestablishing the PIS and Cofins rates levied on financial income to its original values. |
· | 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 relation to telecommunications services, for which the method continued 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 our operational activities). As noted above, in December 2022, Decree No. 11,322/22 reduced by half the PIS and Cofins rates levied on financial income earned by companies subject to the non-cumulative regime. The PIS rates changed from 0.65% to 0.33%. According to the Decree, the reduction would take effect from January 1, 2023. However, on January 2, 2023, it was revoked by the new Government, reestablishing the PIS and Cofins rates levied on financial income to its original values. |
· | FUST. In 2000, the Brazilian government created the Fundo de Universalização dos Serviços de Telecomunicações (“FUST”), a fund that is supported by a tax applicable to all telecommunications services. The purpose of the FUST is to stimulate the expansion, use and improvement of the quality of telecommunications networks and services, to reduce regional inequalities and to stimulate the use and development of new connectivity technologies in order to promote economic and social development. FUST tax is imposed at a 1% rate, levied on gross operating revenues, net of discounts, ICMS, PIS and COFINS, and the cost may not be passed on to clients. Telecommunication companies can draw from the FUST to meet the universal service targets required by Anatel. |
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 judgement confirmed the first level decision. Anatel appealed to High Courts in order to reverse the Appeal decision.
In December 2020, Law No. 14,109 was approved with the purpose of stimulating the use of FUST to expand and improve the quality of telecommunications services, reducing regional inequalities and stimulating the use of new technologies to promote economic and social development. In the case of using FUST’s resources, the law requires the connection of all public schools by 2024 with broadband internet access. The law also provided a 50% reduction in the payment of the mandatory annual contribution of telecommunications operators to the Fund when they execute programs, projects, plans, activities, initiatives, and actions approved by the Fund's Management Council through the use of their own resources. This requirement remains in force until December 2016, but it may be further renewed.
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In the first quarter of 2022, the Federal Government signed Decree 11,004/2022, which regulates the use of FUST and establishes directions for the use of resources by the Management Board, established in 2022.
· | FUNTTEL. In 2000, the Brazilian government created the Fundo para Desenvolvimento Tecnológico das Telecomunicações (“FUNTTEL”), a fund that is supported by, among other sources of income, a contribution tax applicable to all telecommunications companies. 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 it cost may not be passed on to clients. |
· | FISTEL. Fundo de Fiscalização das Telecomunicações (“FISTEL”), is a fund supported by among other sources 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. Such tax consists of: (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 (“EBC”), or the Brazilian National Cinema Agency (Agência Nacional do Cinema) (“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. We understand that such collection is unjustified and is challenging this rate in court.
In December 2020, Law No. 14,108 was sanctioned and exempts FISTEL for 5 (five) years from the base stations and equipment that integrate the machine to machine (M2M) ecosystems and, also, extinguishes the prior licensing. The definition and regulation of M2M communication systems shall be established by Anatel. The Brazilian government also laid out in the budget law for 2021 a tax exemption forecast of FISTEL value. Additionally, in June 2021, Law No. 14,173 was approved, lowering the FISTEL fees on VSATs from R$201.12 to R$26.83.
· | Corporate Income Tax and Social Contribution on Net Income. Income tax expense is a combination of two different types of taxes, the corporate income tax, or IRPJ, and the 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. |
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.
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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, in relation to 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.
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 12.5% for some jurisdictions, as provided in certain Double Taxation Treaties), or 25% in the case of a stockholder 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, we and our subsidiaries paid interest on equity in 2021. Please refer to ““Item 5. — Operating and Financial Review and Prospects” —Dividend Distribution —Interest on Equity” for detailed information.
Tax 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. Therefore, 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 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 580/2018 and Normative Instruction RFB No. 1,700/2017 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.
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.
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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.
We are also required to disclose our affiliates’ activities relating to countries with economic sanctions. We entered into Roaming Agreements for the provision of telecommunication services with mobile networks, from Cuba, Lybia, North Korea, Iran, Russia, Sudan, Syria and Ukraine (Crimea occupied territories).
In accordance with our Code of Ethics, we seek to comply with all applicable laws. The Code of Ethics is available on our website: https://ri.tim.com.br/.
Our activities relating to countries with economic sanctions
The Company is not, to its knowledge, engaged in any activities, transactions or dealings with the Government of Cuba, North Korea, Iran, Lybia, Russia, and Syriatel from Sudan, Syria and Ukraine (Crimea occupied territories), or the Designated Countries.
The activities, transactions or dealings we had in the year ended December 31, 2022 to our 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 and MCI Iran Telecom, in Iran; |
· | Zain Sudan and Sudanese Mobile Telephone, in Sudan; |
· | LLC Astelit, Kyvistar and MTS, in Ukraine; |
· | MTS, Vimpelcom, TMT, Tele 2 and Megafon, in Russia; |
· | Etecsa (also known as Cubacel), in Cuba; and |
· | Syriatel Mobile Telecom SA and MTN Syria, in Syria. |
The impact on our consolidated statement of income arising from Roaming Agreements with networks of the Designated Countries is detailed as follows:
Year ended December 31, 2022 | ||
Revenues | Charges | |
(in reais) | ||
North Korea | - | - |
Ukraine | 2,436.75 | 0.37 |
Sudan | 1,522.30 | 56.27 |
Russia | 145,305.12 | 4,440,822.96 |
Iran | 2,376.58 | 133.70 |
Cuba | 4.40 | 347.27 |
Syria | 1,747.17 | 81,655.05 |
Total | 153,392.32 | 4,523,015.62 |
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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 the 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, 2022 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, 2022 that, to its knowledge, relate in any way to the Designated Countries are:
Roaming Agreements
Its Roaming Agreements are with the following local mobile phone operators:
· | North Korea: none; |
· | Iran: Mobile Company of Iran (MCI), Rightel Communication, TCI, Irancell |
· |
· | Syria: |
Year ended December 31, 2020 | Year ended December 31, 2022 | |||||||
Revenues | Charges | Receivables | Payables | Revenues | Charges | Receivables | Payables | |
(thousands of euros) | (thousands of euros) | |||||||
North Korea | — | - | ||||||
Iran | 2 | 3 | 689 | 2,786 | 5 | 19 | 565 | 401 |
Sudan | 2 | 30 | 2 | 3 | ||||
Cuba | 2 | 184 | - | 143 | ||||
Syria | 1 | 13 | 50 | 115 | 1 | 16 | 54 | 135 |
Total | 5 | 46 | 741 | 2,904 | 8 | 219 | 619 | 679 |
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)ETEC-Empresa de Telecomunicacione in Iran; Sudatel Telecom Group, ZAIN Sudan and Canartel in Sudan;Cuba, and Syrian Telecom Establishment (STE) (Directorate General of Syria)Telecommunication 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, 2020 | ||||
Revenues | Charges | Receivables | Payables | |
(thousands of euros) | ||||
North Korea | — | — | — | — |
Iran | 2 | — | 314 | — |
Sudan | 1,054 | 547 | 1,917 | 1,747 |
Syria | 1,188 | 1,136 | 12,004 | 12,415 |
Total | 2,244 | 1,683 | 14,235 | 14,162 |
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Year ended December 31, 2022 | ||||
Revenues | Charges | Receivables | Payables | |
(thousands of euros) | ||||
North Korea | - | - | - | - |
Iran | - | - | - | - |
Cuba | 628 | 2,409 | 569 | 2,158 |
Syria | 1 | 1,478 | 13,812 | 16,161 |
Total | 629 | 3,887 | 14,381 | 18,319 |
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 forsystems located outside 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.
In September 2016,Syrian territory. TI Sparkle reached an agreement with TCI for the development of a Point of Presence, or POP, of Sparklealso offers Internet backbone inAccess services to Iran and the provision ofCuba through its international IP Transit services from Sparkle to TIC. Currently the POP is not open.backbone system Seabone.
Year ended December 31, 2020 | Year ended December 31, 2022 | |||||
Revenues | Receivables | Revenues | Charges | Receivables | Payables | |
(thousands of euros) | (thousands of euros) | |||||
North Korea | — | - | ||||
Iran | 595 | — | 721 | 192 | 1,409 | 473 |
Sudan | 87 | 13 | ||||
Cuba | 3054 | - | 3,326 | - | ||
Syria | — | 22 | - | 3,601 | - | |
Total | 682 | 13 | 3797 | 192 | 8,336 | 473 |
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, which as of December 31, 20202022 held 66.59% of our shares. In turn, the single largest shareholder of Telecom Italia is Vivendi, which holds, directly, a stake of approximately 23.75% 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 previously held by TIM Participações consisted of the shares of the Company (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 TIM Participações S.A.’s Board of Directors approved the Reorganization, under which TIM Celular was to be merged into the Company. 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 the Company was completed, transferring all of TIM Celular’s operations to TIM S.A., and with the Company 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 TIM Participações 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.
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On July 29, 2020, our boardBoard of directorsDirectors and the boardBoard of directorsDirectors of TIM Participações approved the Merger of TIM Participações into the Company, which became effective on September 28, 2020. The Merger was part of a reorganization of TIM’s corporate group. The business carried out by TIM following the Merger was the same as the business previously carried out by TIM Participações prior to the Merger. Upon the consummation of this transaction and the approval of the listing of Company’sour common shares and ADSs on B3 and NYSE, respectively, TIM Participações S.A.’s shareholders received one share of the Company in exchange for each share of TIM Participações that they held, in accordance with the terms of the Merger Agreement.
On December 10, 2020, our Board of Directors, after reviewing certain studies, approved the establishment of a new company, FiberCo, in preparation for the future segregation of assets and the provision of residential fiber optic infrastructure services.
On December 16, 2020, FiberCo was established as our wholly owned subsidiary, and on November 16, 2021, IHS acquired a 51% equity interest from us in FiberCo. As a result of the transaction, FiberCo ceased to be our wholly owned subsidiary. We now hold 49% of FiberCo’s share capital and IHS holds the remaining 51%. With the completion of the acquisition, FiberCo changed its corporate name to I-Systems. For more details on this transaction, see “Item 4. Information on the Company—A. History and Development of the Company—2021 Important Events—Completion of the transaction between IHS and I-System.”
On April 20, 2022, we informed our shareholders and the market in general that we had acquired 100% of the capital stock of SPE Cozani, making it a wholly-owned subsidiary. The acquisition of this company corresponds to the portion of the assets, rights and obligations of Oi Móvel that we acquired.
On June 28, 2022, the shareholders’ ratified, at an extraordinary general meeting, our acquisition of shares representing 100% of the capital stock of SPE Cozani.
On March 30, 2023, our shareholders approved our merger with SPE Cozani (then a wholly-owned subsidiary) pursuant to which SPE Cozani would be merged into TIM S.A., subject to certain conditions, including authorization by Anatel and the closing processes that are required under Brazilian corporate law to consummate the merger of two companies, pursuant to the Protocol and Justification of incorporation.
On March 31, 2023, at a meeting of our Board of Directors, it was confirmed that the outstanding conditions for the merger of SPE Cozani had been met, with an effective date of April 1, 2023, following which date SPE Cozani was merged into the Company and ceased to exist as a separate legal entity. Pursuant to the merger, we succeeded SPE Cozani in respect of all of its rights and obligations.
The following chart illustrates our current ownership structure:
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D. Property, Plant 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, 2020,2022, we had more than 4360 thousand eNodeB, more than 2017 thousand NodeB, more
than 1513 thousand BTS and more than 108112 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 2020,2022, we had leased approximately 108,54771,631 square meters of real property, all of which was available for office space. We also lease approximately 23,73425,075 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;domestically, we do not own or lease any property or equipment outside Brazil.
TIM’sOur strategic plan for the 2021-20232023-2025 period, or the Industrial Plan 2021-2023,2023-2025, forecasts Company’sour capital expenditures of approximately R$13.0 billion, considering TIM S.A. operation on a standalone approach, and R$13.514.0 billion, considering the combination with the UPI Oi Mobile Assets. 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’sour financial condition and operating results should be read in conjunction with the Company’sour audited consolidated financial statements as of December 31, 20202022 and 20192021 and for each of the three years in the period ended December 31, 20202022 included elsewhere in this annual report that have been prepared in accordance with IFRS, as issued by IASB, as well as with the information presented under “Item 3. Key Information—A. Selected Financial Data.”
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Brazilian Political and Economic Overview
In contrast with 2019, whichThe year 2022 was marked by political uncertainties, mainly due to polarized elections, which resulted in consistent but limited economic recovery after the improvement of the Brazilian economy and continued recovery of GDP, 2020 was definedtwo prior years were significantly impacted by the COVID-19 pandemic and its consequent societal and economic impacts, which contributed to a decline in GDP of 4.1%, related to government lock-down and social distancing measures during the year that resulted in general declines in business levels and trade. The trade balance closed the year with a surplus of U.S.$50.9 billion, representing a growth of 8.3% compared to 2019. Of note was the 10.4% decrease in imports that mostly offset the 6.9% decrease in exports. Inflation, measured by the IPCA, achieved 4.52%, its highest annual rate since 2016, exceeding the midpoint of the target set by Central Bank, which was 4.00% for the year. The performance is explained by the impacts of the growth of foods and beverages prices, driven by the strong demand for these products, the rise of dollar and the prices of commodities in the international market. The SELIC, or basic interest rate, was further reduced in 2020 and closed the year at a historical low of 2.0%, a continued reduction of 2.5 percentage points compared to the SELIC rate of 4.5% at the end of 2019. This movement is explained by stimulus measures being undertaken to prompt an economic recovery following lock-down measures implemented by the government in response to the COVID-19 pandemic and a temporary high inflation impact expectation. The Brazilian government and Central Bank have taken and will likely continue to take actions to change or adjust economic policies as a reaction to turmoil in the financial markets and increased volatility caused by the COVID-19 outbreak.
In Europe, the United Kingdom formally left the European Union on January 31, 2020, on withdrawal terms which established a transition period until December 31, 2020, during which the UK would be treated as if it were still a member of the EU. On December 24, 2020, the EU and the UK reached an agreement that confirmed the departure of the UK from the bloc and that established certain conditions for their commercial relationship from January 1, 2021 onwards. Nonetheless, given the complexity of negotiations, some topics are yet to be discussed, such as terms for the provision of financial services. There can be no assurances that such negotiations will be successful or certainty that European Union law will continue to apply in and to the United Kingdom following the expiration of the transition period. Until the future relationship between the European Union and the United Kingdom is established, it is difficult to anticipate the potential impact of Brexit.
pandemic. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Brazil—We may be impacted by volatility in the global financial markets”.
Despite initial expectations, Brazil recorded a decrease in the unemployment rate (9.3% by the end of the year), registering the lowest number since 2015. Government measures on the eve of elections, such as the expansion of the Auxílio Brasil aid program, were factors that helped boost economic activity. Brazilian Gross Domestic Product (GDP) ended the year up 2.9%. Inflation, measured by the Extended Consumer Price Index (IPCA), ended 2022 at 5.62%. Among the factors that impacted such result, the food industry recorded a price increase of 11.6%, as a result of worse weather conditions during the period. Increases in commodity prices, mainly oil, also played a role in pushing inflation above the target ceiling for the second year in a row. The trade balance ended the year with a surplus of U.S.$62 billion, accounting for an increase of 1.6% compared to the end of 2021. Exports closed the year at U.S.$355 billion and recorded a positive change of 19.3% compared to 2021. Imports recorded U.S.$272.7 billion, accounting for a growth of 24.3% compared to 2021. The export and import values represent the highest amounts on record.
In 2022, the United States, Joseph Biden wonexchange rate recorded great volatility, with the presidential electionReal appreciating against the US dollar in relation to the end of the previous year. As of December 31, 2022 the exchange rate was R$5.218 to U.S.$1.00, based on the commercial selling rate for U.S. dollars as reported by the Brazilian Central Bank. Uncertainties regarding inflation in the United States and assumed officeexternal factors such as the 46th Presidentongoing war between Russia and Ukraine contributed to volatility in the currency. In relation to the Brazilian Real, U.S.$ recorded a high of R$5.68 against a low of R$4.60 during the year, accounting for a variation of 23.5% in a scenario of domestic uncertainties, fiscal risks and many discussions about, for example, the Transition Constitution Amendment Proposal (PEC), not allowing a better performance of the United States on January 20, 2021. The U.S. president has considerable influence, which may materially and adversely global economy and political stability. It is unclearBrazilian currency against the degree to which current political divisions in the United States will continue into the next four-year presidential term. We are also unable to predict the policies that will be adopted by a new presidential administration and the effects of any such policies, if implemented. These political divisions and policies may materially adversely affect the United States and global economies and capital markets, including the Brazilian economy and capital markets.
In regard to foreign exchange, the Brazilian real depreciated 28% compared to the U.S. dollar in 2020. During the year, the exchange rate fluctuated due to uncertainties caused by the current COVID-19 pandemic and related measures to be implemented by national and local governments, 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 2021, the real continued to depreciate considerably as compared to the U.S.US dollar. As of April 29, 2021,27, 2023, the exchange rate for U.S. dollars as reported by the Central Bank was R$5.3665.015 per U.S.$1.00, due to the expectations regarding the impact of overall market declines and continued volatility arising from the COVID-19 pandemic, among other factors.1.00.
Impact of Inflation on Our Results of Operations
Inflation directlyIn 2021 and 2022, Brazil’s economic environment was relatively volatile due to the impacts our results of operationsthe COVID-19 pandemic, geopolitical divisions, and the Brazilian presidential election. Despite this environment, inflation fell in 2022 when compared to the previous year. After a peak in 2021, IPCA fell from a double digit level to 5.79% by December 2022. Market expectations today suggest a continuation of mid-single digit inflation for 2023 in Brazil. The Brazilian Central Bank Survey as of April 10, 2023 shows that it is expecting IPCA to measure inflation of 5.98%.
In a time of high inflation globally, the trajectory of inflation in Brazil is less worrisome when considered in comparison with certain of our assets and liabilities are subjectother countries. However, having the ability to monetary adjustments by reference to indexes that measure or that are impactedmanage the impacts caused by inflation suchis essential in a country as IPCA, IGPM, TJLP,volatile as Brazil. We have been able to manage those impacts in recent years due to: (i) our strong cost efficiency policy in which we implement multiple measures to control spending using digitalization initiatives, contract renegotiation, make-or-buy reviews; (ii) price readjustments to our postpaid clients, where the existing customers have their bills priced-up in a more-for-more strategy and SELIC. (iii) elimination of low face value recharges, where prepaid clients are directed to higher face value top-ups when they need to recharge their credit.
In 2020,2022, the net impact ofmain lines in our profit and loss impacted directly by inflation adjustments was a loss of R$44 million, compared to a gain of R$1,072 million in 2019. The net loss impact in 2020 can be explained by losses arising from provisions for aggregate contingent amount of outstanding civil, laborwere personnel costs, rental costs, and tax claims pending against us, which was partiallylease costs. Those impacts were mostly offset by gains arising from restatements of taxes. Our gain in 2019 is mainly a result of positive credit adjustments from a legal proceeding of TIM Celular S.A. (merged into the Company) on the exclusion of ICMS from PISaforementioned cost control measures and COFINS tax bases.price increases.
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.Critical Accounting Policies
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 tocritical accounting policies, see our audited consolidated financial statements discount rates applied by managementincluded 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.consolidated financial statements.
On January 1, 2019, the Company adopted 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 first-time adoption of this standard resulted in the recognition of a right of use (ROU) assets and correspondent lease liability of R$5,256 million as of January 1, 2019.
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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.
Impairment Losses of Non-Financial Assets
Impairment losses occur when the book value of an asset or cash generating unit exceeds its recoverable value, which is the greater of (i) fair value less selling costs and (ii) value in use. The calculation of fair value less selling costs is based on information available on sales of similar assets or market prices less additional costs to dispose of the asset.
As of December 31, 2020 and 2019, 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.
Leases
We are lessees in a significant number of lease agreements. As a result of the adoption of the IFRS 16–Lease accounting standard on January 1, 2019, our management decided to consider the following when assessing the value of lease liabilities and right-of-use assets, such as: (i) estimate of the lease term, considering non-cancellable period and the period covered by options to extend the contract term, when the exercise depends only on the Company and is reasonably certain; and (ii) use of certain assumptions to calculate the discount rate.
We are not able to readily determine the interest rate implicit on a particular lease agreement and, therefore, we consider our incremental rate on loans to measure our lease liabilities. Incremental rate on our borrowings is the interest rate that we would have to pay when borrowing, for a similar term and with a similar guarantee, the resources necessary to obtain an asset with a value equivalent to the right of use asset in similar economic circumstances. Thus, such lease assessment considers non-cancellable period and the period covered by options to extend the contract term. We estimate the incremental rate using observable data (such as market interest rates) when available and also certain aspects that are specific to our activities (such as the cost of debt).
Results of Operations
The following discussion should be read in conjunction with “Item 3. Key Information” and “Item 4. Information on the Company” and “Item 3. Key Information.Company.” 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.”
The following table shows certain components of our statement of operationsincome for each year in the three-year period ended December 31, 2020,2022, as well as the percentage change from year to year.
Year ended December 31, | Percentage change | Year ended December 31, | Percentage change | |||||||
2020 | 2019 | 2018 | 2020 - 2019 | 2019 – 2018 | 2022 | 2021 | 2020 | 2022 - 2021 | 2021 - 2020 | |
(in thousands of reais) | (in thousands of reais) | |||||||||
Revenue | 17,267,812 | 17,377,194 | 16,981,329 | (0.6) | 2.3 | 21,530,801 | 18,058,027 | 17,267,812 | 19.2 | 4.6 |
Cost of services provided and goods sold | (7,996,615) | (7,433,731) | (7,701,418) | 7.6 | (3.5) | (10,655,981) | (8,443,023) | (7,996,615) | 26.2 | 5.6 |
Gross income | 9,271,197 | 9,943,463 | 9,279,911 | (6.8) | 7.2 | 10,874,820 | 9,615,004 | 9,271,197 | 13.1 | 3.7 |
Operating income (expenses): | ||||||||||
Selling expenses | (4,443,027) | (4,986,289) | (4,970,780) | (10.9) | 0.3 | (5,596,211) | (4,621,788) | (4,443,027) | 21.1 | 4.0 |
General and administrative expenses | (1,673,290) | (1,717,859) | (1,608,319) | (2.6) | 6.8 | (1,808,735) | (1,723,384) | (1,673,290) | 5.0 | 3.0 |
Other income (expenses), net | (351,854) | 1,275,542 | (283,289) | n.a. | n.a. | (248,371) | 497,771 | (351,854) | N.A. | |
Share of loss of an associate | (61,587) | (11,572) | – | 432.2 | N.A. | |||||
Operating income (expenses) | (6,468,171) | (5,428,606) | (6,862,388) | 19.1 | (20.9) | (7,714,904) | (5,858,973) | (6,468,171) | 31.7 | (9.4) |
Operating income | 2,803,026 | 4,514,857 | 2,417,523 | (37.9) | 86.8 | |||||
Profit before financial income and expenses | 3,159,916 | 3,756,031 | 2,803,026 | (15.9) | 34.0 | |||||
Financial income (expenses): | ||||||||||
Financial income | 438,598 | 1,430,171 | 412,733 | (69.3) | 246.5 | 1,318,948 | 1,091,748 | 438,598 | 20.8 | 148.9 |
Financial expenses | (1,242,255) | (1,408,053) | (951,439) | (11.8) | 48.0 | (2,762,963) | (1,745,213) | (1,242,255) | 58.3 | 40.5 |
Foreign exchange variations | (6,965) | (908) | 1,373 | n.a. | n.a. | 5,007 | 659 | (6,965) | 659.8 | N.A. |
Financial income (expenses) | (810,622) | 21,210 | (537,333) | n.a. | n.a. | (1,439,008) | (652,806) | (810,622) | 120.4 | (19.5) |
Income before income and social contribution taxes |
1,992,404 | 4,536,067 | 1,880,190 |
(56.1) | 141.3 | |||||
Income and social contribution taxes | (164,150) | (913,940) | 664,911 | n.a. | n.a. | |||||
Net income for the year | 1,828,254 | 3,622,127 | 2,545,101 | (49.5) | 42.3 | |||||
Profit before income tax and social contribution | 1,720,908 | 3,103,225 | 1,992,404 | (44.5) | 55.8 | |||||
Income tax and social contribution | (50,153) | (146,051) | (164,150) | (65.7) | (11.0) | |||||
Profit for the year | 1,670,755 | 2,957,174 | 1,828,254 | (43.5) | 61.7 |
Results of Operations for the Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021
Revenue
Our revenue consisted of:
· | mobile and fixed services: (i) local and long distance voice, (ii) data and content (value-added services), (iii) interconnection, (iv) revenue from new partnership agreements, described as “Customer Platform” (financial, education and advertising), and (v) other services; and |
· | goods sold: telephones, mini-modems, tablets and other equipment. |
The composition of our revenue by category of service is set out in Note 29 to our consolidated financial statements and discussed below.
Our revenue for the year ended December 31, 2022 was R$21,531 million, an increase of 19.2% as compared to the year ended December 31, 2021. Mobile service revenue increased 19.8% year over year, from R$16,349 million in the year ended December 31, 2021 to R$19,594 million in the year ended December 31, 2022. Fixed service revenue increased by 7.6% year over year, from R$1,147 million for the year ended December 31, 2021 to R$1,234 million for the year ended December 31, 2022. These results were driven by the increase in: (i) mobile services revenue: by the acquisition of Oi’s mobile assets and our efforts to undertake our strategy to monetize our customer base; (ii) fixed service revenue: mainly driven by the consistent expansion of TIM UltraFibra; and (iii) products revenue, due to a better product sales mix and as a result of the success of partnerships and campaigns carried out throughout the year. See “Item 4. Information on the Company—A. Information on the Company — A History and Development of the Company—Historical Background.”
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Our management understands that a breakdown of revenue, net of discounts and PIS and COFINS taxes, can be helpful in an analysis of our revenue dynamics. The details of our revenue, net of discounts and PIS and COFINS taxes, are presented below:
Year ended December 31, | Percentage change | ||
2022 | 2021 | 2022 – 2021 | |
(in millions of reais) | |||
Total net revenue | 21,531 | 18,058 | 19.2 |
Service revenue | 20,829 | 17,497 | 19.0 |
Service revenue – mobile | 19,594 | 16,349 | 19.8 |
Client generated | 18,002 | 14,843 | 21.3 |
Interconnection | 450 | 533 | (15.6) |
Customer platform | 188 | 119 | 57.4 |
Others | 954 | 853 | 11.8 |
Service revenue – fixed | 1,234 | 1,147 | 7.6 |
Goods sold | 702 | 561 | 25.0 |
Service Revenue
Service revenue for the year ended December 31, 2022 was R$20,829 million, an increase of 19.0% compared to R$17,497 million in the year ended December 31, 2021.
Mobile services revenue, or MSR, increased 19.8% to R$19,594 million for the year ended December 31, 2022, from R$16,349 million for the year ended December 31, 2021, reflecting our consistent performance in both postpaid and prepaid segments as well as in our customer platform strategy. Client generated revenue, or CGR, increased by 21.3%, from R$14,843 million for the year ended December 31, 2021 to R$18,002 million for the year ended December 31, 2022. This was driven by strong execution in the:
· | postpaid segment, explained by the following factors: (i) additional revenues generated by the migration of approximately 7 million (at the time of the Operation closing) of Oi’s customers to our business; (ii) the net effect between the price ups applied in the first half of the year and the already expected impact on the retention of customers dissatisfied with the new plans pricing; and (iii) reduction of prices due to the reduction of ICMS tax rates; and |
· | prepaid segment, due to: (i) additional revenue generated by the migration of approximately 9 million (at the time of the Operation closing) of Oi’s customers to our business; (ii) changes in offers and tariffs implemented during the year; and (iii) government emergency assistance. The latter two contributed to the increase in customer consumption, partially affected by the cannibalization effects generated by the adjustments made to the plans because of the ICMS tax rate reductions in Brazil. |
Mobile average monthly revenue per user, or ARPU, was R$26.10 for the year ended December 31, 2022, a decrease of 0.9% as compared to the year ended December 31, 2021. The result reflects dilution from the addition of customers arriving from Oi which had a lower ARPU. These effects were partially offset in the fourth quarter of 2022 as a result of a client base clean-up carried out in November of the silent lines that came from Oi. The segments’ ARPU, which excludes other mobile revenues and customer platform, decreased by 2.5% year over year in postpaid (R$37.50) and increased by 1.1% year over year in prepaid (R$13.1). We understand this is a relevant profitability metric that allows comparability with other peers in the telecommunication sector, calculated by dividing mobile services revenues by the average monthly customer base.
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See “Item 4. Information on the Company—A. Information on the Company — A History and Development of the Company—Historical Background.
Interconnection revenue decreased 15.6%, to R$450 million for the year ended December 31, 2022 from R$533 million for the year ended December 31, 2021. The result was impacted mainly by a 13.1% year over year reduction in incoming traffic and due to a 4.0% year over year decrease in mobile termination revenue, or MTR. The incidence of MTR on net service revenue reached 1.9% in 2022.
Others revenue increased 11.8% year over year, to R$954 million for the year ended December 31, 2022 from R$853 million for the year ended December 31, 2021 explained by the growth in revenue generated by sharing contracts and network swaps, reflecting our strategy to expand the fiber transport infrastructure (backbone and backhaul) with greater efficiency of capital allocation (capital expenditure and operating expenditure).
Fixed service revenue increased 7.6% to R$1,234 million for the year ended December 31, 2022 from R$1,147 million the year ended December 31, 2021, mainly due to the growth in TIM UltraFibra by 10.7% year over year.
Revenue from goods sold increased 25.0%, from R$561 million for the year ended December 31, 2021 to R$702 million for the year ended December 31, 2022, mainly explained by the success of partnerships and campaigns carried out throughout the year. Those initiatives helped improve the proportion of high-value products in the sales mix during the year with the average gross price of a handset increasing 28.0% year-over-year, despite a reduction in sales volume of 6.5% year-over-year.
Cost of Services Provided and Goods Sold and Operating Expenses
Cost of services provided and goods sold and operating expenses (comprised of selling, general and administrative expenses) increased 22.1% for the year ended December 31, 2022 as compared to the year ended December 31, 2021.
The following table shows the components of costs of services provided and goods sold and operating expenses (comprised of selling, general and administrative expenses) for each of the years indicated.
Year ended December 31, | Percentage change | ||
2022 | 2021 | 2022 – 2021 | |
(in millions of reais) | |||
Personnel | (1,278) | (1,126) | 13.5 |
Third-party services | (3,711) | (2,992) | 24.0 |
Interconnection and means of connection | (2,512) | (1,840) | 36.5 |
Depreciation and amortization | (6,827) | (5,692) | 19.9 |
Taxes, fees and contributions | (968) | (842) | 15.0 |
Rent and insurance | (623) | (492) | 26.6 |
Cost of goods sold | (871) | (731) | 19.2 |
Publicity and advertising | (565) | (460) | 22.8 |
Expected credit losses of trade accounts receivable | (626) | (545) | 14.9 |
Others | (79) | (68) | 16.2 |
Total | (18,061) | (14,788) | 22.1 |
Personnel
Personnel costs and expenses increased 13.5% in the year ended December 31, 2022 as compared to the year ended December 31, 2021, to R$1,278 million from R$1,126 million, respectively. This increase can be explained by (i) inflation as compared to the previous year, which resulted in an increase in wages and benefits of our employees, since most of our employees’ wage and salary increases are generally tied to inflation rates. However, due to its structure, most of the cost impacts based on inflation are absorbed in the following year. In 2021, the inflation rate in our collective bargain labor agreements was 10.42%, while in 2022 the inflation rate decreased to 8.82%. In order to maintain our financial sustainability, we negotiate different scenarios with our employees’ category trade union in order to keep our employees’ purchasing power and, at the same time, manage our personnel costs as efficiently as possible; (ii) a lower average number of employees (a decrease of 1% in the year ended December 31, 2022 as compared to the year ended December 31, 2021), mainly because of the outsourcing of business processes we undertook last year; and (iii) an increase in costs with short term incentives in 2022, due to a better general result than expected for the previous and current year. Those results are based on our corporate and functional goals, aligned with our corporate plan.
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Third-Party Services
Third-party services costs and expenses increased 24.0%, to R$3,711 million in the year ended December 31, 2022 as compared to R$2,992 million in the year ended December 31, 2021, mainly due to: (i) higher expenses related to the management of the customer base (billing, collection, and services); (ii) higher expenses with implementing our “Journey to Cloud” project, involving the migration of our IT infrastructure to the cloud; (iii) expenses related to the temporary service agreement with Oi – which is a temporary contract to provide management services for the subscriber base and maintenance of the Network Operations Center (“NOC”) as part of the Oi Transaction; and (iv) increase in postpaid and prepaid sales and related commissioning expenses.
Interconnection and Means of Connection
Our costs for interconnection and means of connection increased 36.5%, to R$2,512 million in the year ended December 31, 2022 as compared to R$1,840 million in the year ended December 31, 2021. This performance was mostly explained by: (i) higher expenses related to the new sites that were incorporated as part of the Oi Transaction; (ii) higher costs related to the last mile infrastructure rental from I-Systems; and (iii) higher costs with content providers (for the provision of value-added services).
Depreciation and Amortization
Depreciation and amortization costs and expenses increased 19.9% in the year ended December 31, 2022 as compared to the year ended December 31, 2021, to R$6,827 million from R$5,692 million, respectively. This increase is mainly due to the Oi Transaction, primarily due to the effect of the depreciation of the right-of-use of sites that were purchased through the transaction.
Taxes, Fees and Contributions
Taxes, fees and contributions costs and expenses increased 15.0% in the year ended December 31, 2022, to R$968 million from R$842 million in the year ended December 31, 2021. For further information, see “Item 4. Information on the Company—B. Business Overview—Taxes on Telecommunications Goods and Services.”
Rent and Insurance
Rent and insurance costs and expenses increased 26.6% to R$623 million in the year ended December 31, 2022, from R$492 million in the year ended December 31, 2021. This increase is mainly related to the effects of inflationary re-adjustments provided for in the contracts.
Cost of Goods Sold
Our cost of goods sold increased 19.2%, from R$731 million in the year ended December 31, 2021, to R$871 million in the year ended December 31, 2022. This increase is mainly explained by a higher proportion of high-value products in the sales mix during the year with the average cost of a handset increasing 25.2% year-over-year, despite a reduction in sales volume of 6.5% year-over-year.
Publicity and Advertising
Publicity and advertising expenses increased 22.8% in the year ended December 31, 2022, as compared to the year ended December 31, 2021, to R$565 million from R$460 million, respectively. This increase is mainly explained by higher advertising expenses reflecting new marketing actions in the face of the launch of 5G network, the arrival of Oi customers into our network and other traditional seasonal campaigns throughout the year.
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Expected credit losses of trade accounts receivable
Expected credit losses of trade accounts receivable increased 14.9%, to R$626 million in the year ended December 31, 2022, as compared to R$545 million the year ended December 31, 2021. This increase was mainly due to the impact of a larger revenue base exposed to bad debt (from payment defaults on bills), including the increase in size of our postpaid customer base due to the Oi Transaction.
Other Income (Expenses), Net
Other income (expenses), net, changed to an expense of R$248 million in the year ended December 31, 2022, from an income of R$498 million in the year ended December 31, 2021. This was mainly due to the impact in 2021 of the gain from the sale of 51% of our equity interest in I-Systems to IHS, in the amount of R$2,709 million, which is composed of the (secondary) cash paid to us and the fair value of the non-controlling interest of 49% that we retained, partially offset by the write-off of I-Systems net assets, goodwill and deferred income tax related to goodwill due to the sale of 51% of I-Systems (formerly FiberCo).
Profit for the year
The following table shows our profit for the year, as well as the percentage change, for each of the periods indicated:
Year ended December 31, | Percentage change | ||
2022 | 2021 | 2022 – 2021 | |
(in millions of reais) | |||
Profit before financial income (expenses) and income taxes | 3,160 | 3,756 | (15.9) |
Financial income (expenses) | (1,439) | (653) | 120.4 |
Income tax and social contribution | (50) | (146) | (65.8) |
Profit for the year | 1,671 | 2,957 | (43.5) |
Financial Income (Expenses)
In the year ended December 31, 2022, net financial expenses were R$1,439 million, as compared to the R$653 million in the year ended December 31, 2021. This increase is mainly as a result of: (i) a higher volume of interest on leases, due to the lease agreements for the 7,200 sites acquired in the Oi Transaction; (ii) a higher SELIC rate in 2022; and (iii) a higher debt level after the completion of the Oi Transaction. Furthermore, this was impacted by lower revenue generated by the mark-to-market effect relating to the potential subscription bonus for the share capital of C6 Bank which is subject to ongoing arbitration.
Income tax and Social Contribution
Income tax and social contribution expenses totaled R$50 million in the year ended December 31, 2022, compared to R$146 million in the year ended December 31, 2021. In 2022, pointing to a 65.7% YoY reduction, mainly explained by a drop in the tax base as a result of the sale of control of I-Systems in 2021.
In the year ended December 31, 2022, we recorded current income tax and social contribution in the amount of R$175 million and R$9 million of deferred taxes expense. The tax benefits related to SUDAM/SUDENE (R$157 million), and interest on equity (R$476 million) contribute to reduce our income taxes expense.
Profit for the Year
As a consequence of the explanations above, our profit for the year ended December 31, 2022 was R$1,671 million, representing a decrease of 43.5% from our profit of R$2,957 million for the year ended December 31, 2021.
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Results of Operations for the Year Ended December 31, 20202021 Compared to the Year Ended December 31, 20192020
Revenues
Our revenues consisted of:
· |
· |
The composition of our operating revenues by category of service is presented in Note 2627 to our consolidated financial statements and discussed below.
Our revenue for the year ended December 31, 20202021 was R$17,26818,058 million, a decreasean increase of 0.6%4.6% as compared to the year ended December 31, 2019. Net mobile2020. Mobile service revenue decreased 0.2%increased 4.7% for the year ended December 31, 20202021 as compared to the year ended December 31, 2019,2020, from R$15,648 million in the year ended December 31, 2019 to R$15,610 million in the year ended December 31, 2020. Net landline2020 to R$16,349 million in the year ended December 31, 2021. Landline service revenue increased by 11.1%8.8%, to R$1,147 million for the year ended December 31, 2021 from R$1,054 million for the year ended December 31, 2020 from R$949 million for the year ended December 31, 2019, mainly explained by the results from the strong2020. This performance ofwas driven by: (i) Mobile Postpaid performance; (ii) Customer Platform Revenue; and (iii) TIM Live, which more than offset the decline in revenues from other fixed segments (such as corporate and wholesale).UltraFibra growth.
Our management understands that a breakdown of revenue, net of discounts and PIS and COFINS taxes, can be helpful in an analysis of our revenue dynamics. The details of our revenue, net of discounts and PIS and COFINS taxes, are presented below:
Year ended December 31, | Percentage change | Year ended December 31, | Percentage change | |||
2020 | 2019 | 2020 – 2019 | 2021 | 2020 | 2021 – 2020 | |
(in millions of reais) | (in millions of reais) | |||||
Total revenue | 17,268 | 17,377 | (0.6) | 18,058 | 17,268 | 4.6 |
Service revenue | 16,665 | 16,597 | 0.4 | 17,497 | 16,665 | 5.0 |
Service revenue – mobile | 15,610 | 15,648 | (0.2) | 16,349 | 15,610 | 4.7 |
Client generated | 14,351 | 14,372 | (0.1) | 14,843 | 14,351 | 3.4 |
Interconnection | 528 | 477 | 10.6 | 533 | 528 | 0.9 |
Others | 731 | 799 | (8.5) | 853 | 731 | 16.7 |
Service revenue – landline | 1,054 | 949 | 11.1 | 1,147 | 1,054 | 8.8 |
Goods sold | 603 | 780 | (22.7) | 561 | 603 | (7.0) |
Service Revenue
Service revenue for the year ended December 31, 20202021 was R$16,66517,497 million, an increase of 0.4%5.0% compared to R$16,59716,665 million in the year ended December 31, 2019.2020. Revenue from mobile services, or MSR, decreased 0.2%increased 4.7% to R$16,349 million for the year ended December 31, 2021, from R$15,610 million for the year ended December 31, 2020, from R$15,648.2 million for the year ended December 31, 2019, mostly influenced by the impactsreflecting our strategy to monetize its customer base through two pillars: (i) offer differentiation; and (ii) migration of the COVID-19 pandemic, mostlycustomer base to the prepaid segment, with a reduction in rechargers in the segment, in addition to reduced commercial activities in postpaid, an effect of the economic fallout of the COVID-19 pandemic.higher-value plans.
As mentioneddisclosed above, client generated revenues, or CGR, decreasedincreased by 0.1%3.4%, from R$14,372 million for the year ended December 31, 2019 to R$14,351 million for the year ended December 31, 2020.2020 to R$14,843 million for the year ended December 31, 2021. This was driven by the same factors that impacted MSR.
Interconnection revenue grew 10.7%increased 0.9%, for the year ended December 31, 2020, with R$528 million as compared to R$477533 million for the year ended December 31, 2019.2021 from R$528 million for the year ended December 31, 2020. The result was impacted by a higher rate of Mobile Termination Revenue, or MTR, of 10.2%7.2% YoY, and an increasea decrease in incoming traffic by 12.1%9.9% YoY. After successive
cuts to MTR, the foreseen Anatel’s increase was applied in February 2020.2021. The incidence of MTR represents 2.6%2.5% of service revenues in the year.
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Other Mobile RevenuesOthers revenue increased 16.7% YoY, to R$853 million for the year ended 2020 down by 8.5% YoY, atDecember 31, 2021 from R$731 million. Frommillion for the last quarter ofyear ended December 31, 2020 this line began to be positively impacted by R$14.5 million of revenuesthe higher revenue from the commercial agreement with C6 Bank (as per Note 27 to TIM S.A.’s Financial Statements). This decrease is explained by the reduction of fees on other mobile service revenues.network sharing. It should be noted that the performance of this line is still impacted mainly by revenues from networkcapacity exchange and sharing and swap agreements, in line with the Company'sare key for our strategy to expand the fiber optic transport infrastructure (backbone and backhaul) with higher efficiency in asset allocation (Capex, allocating resources (capital expenditure and Opex).operating expenditure) more efficiently.
MonthlyMobile ARPU was R$24.926.4 for the year ended December 31, 2020,2021, an increase of 4.9%5.9% as compared to the year ended December 31, 2019.2020. The main explanation the maintenance of the company's successful effortsresult reflects our strategy to monetize its customer base through migrationstwo pillars: (i) offer differentiation; and (ii) migration of the customer base to higher value prepaid and postpaidhigher-value plans. The segments’ ARPU, which excludes other mobile revenues and Customer Platform, increased by 4.9%2.5% YoY in prepaid (R$12.6)12.9) and by 3.4%1.7% YoY in postpaid (ex-M2M) (R$45.6)46.4). We understand this is a relevant profitability metric that allows comparability with other peers in the telecommunication sector, calculated by dividing mobile services revenues by the average monthly customer base.
Landline serviceService revenue – landline increased 11.1%8.8% to R$1,0541,147 million for the year ended December 31, 2020 as compared to2021 from R$9491,054 million the year ended December 31, 2019,2020, mainly due to the growth in TIM LiveUltraFibra by 27.9%, which was offset by the decrease in revenues from the fixed segment by 7%.
Goods Sold14.7% YoY.
Revenue from the sale of goods sold decreased 22.7%7.0%, from R$780 million for the year ended December 31, 2019 to R$603 million for the year ended December 31, 2020 reflecting the closing of most of the Company’s physical stores, its main handset sales channel, from March to June, due to the social distancing measures adopted to fight the spread of the new coronavirus pandemic.
Costs and Operating Expenses
Costs and operating expenses decreased 0.2%R$561 million for the year ended December 31, 20202021, reflecting a more challenging macroeconomic scenario in the year and supply issues on some equipment during the third quarter.
Cost of services provided and goods sold and Operating Expenses
Cost of services provided and goods sold and operating expenses (comprise of selling, general and administrative expenses) decreased 4.8% for the year ended December 31, 2021 as compared to the year ended December 31, 2019.2020.
The following table shows the components of costs of services provided, goods sold and operating expenses (comprised of selling, general and administrative expenses) for each of the years indicated.
Statement of OperationsIncome Data: Operating Costs and Expenses
Year ended December 31, | Percentage change | Year ended December 31, | Percentage change | |||
2020 | 2019 | 2020 – 2019 | 2021 | 2020 | 2021 – 2020 | |
(in millions of reais) | (in millions of reais) | |||||
Personnel | (1,012) | (1,071) | (5.5) | (1,126) | (1,012) | 11.3 |
Third-party services | (2,870) | (3,124) | (8.1) | (2,992) | (2,870) | 4.3 |
Interconnection and means of connection | (1,673) | (1,420) | 17.8 | (1,840) | (1,673) | 10.0 |
Depreciation and amortization | (5,527) | (5,129) | 7.8 | (5,692) | (5,527) | 3.0 |
Taxes, fees and contributions | (814) | (832) | (2.1) | (842) | (814) | 3.4 |
Rent and insurance | (440) | (434) | 1.4 | (492) | (440) | 11.8 |
Cost of goods sold | (756) | (932) | (18.9) | (731) | (756) | (3.3) |
Publicity and advertising | (377) | (355) | 6.2 | (460) | (377) | 22.0 |
Losses on doubtful accounts | (553) | (748) | (26.1) | |||
Expected credit losses of trade accounts receivable | (545) | (553) | (1.4) | |||
Others | (91) | (95) | (3.6) | (68) | (91) | (25.3) |
Total operating expenses | (14,113) | (14,138) | (0.2) | |||
Total | (14,788) | (14,113) | 4.8 |
Personnel
Personnel costs decreasedand expenses increased by 5.5%11.3% in the year ended December 31, 20202021 as compared to the year ended December 31, 2019,2020, to R$1,012 1,126 million from R$1,0711,012 million, respectively. This decreaseincrease can be explained by lower commercial personnel expenses dueinflation as compared to the closing of physical stores in the second quarter of 2020 and, negatively, by organic elements such as inflation onprevious year, which increased wages and benefits since most of our employees’ wage and salary increases are generally tied to inflation rates. In 2021, we also had a (i) bigger salary allowance than last year, in order to re-adjust employees’ salaries by the accumulated inflation rate; (ii) lower average number of employees (a decrease of 2.6% in the firstyear ended December 31, 2021 as compared to the year ended December 31, 2020); (iii) non-recurring cost resulting from the COVID-19 pandemic, by which the Brazilian government approved some temporary laws for maintaining jobs, which reduced some of our labor costs, such as social charges, salaries and third quarter ofsome benefits for the most economically impacted areas (at TIM, these measures were applied basically for people who worked at stores and those who were classified as COVID-19 at-risk groups and couldn’t work from home) in the year ended December 31, 2020.
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Third-Party Services
Third-party services costs decreased 8.1%and expenses increased 4.3%, to R$2,992 million in the year ended December 31, 2021 as compared to R$2,870 million in the year ended December 31, 2020, as compared to R$3,124 million in the year ended December 31, 2019, mainly due to the decreaseincrease 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 increased 17.8%10.0%, to R$1,6731,840 million in the year ended December 31, 20202021 as compared to R$1,4201,673 million in the year ended December 31, 2019.2020. This performance was boosted bymainly due to a higher mobile termination rate (MTR) as from February 2020 and increased Network costs, due toat the increasebeginning of rental and infrastructure sharing and maintenance expenses.the year.
Depreciation and Amortization
Depreciation and amortization costs and expenses increased by 7.8 %3.0% in the year ended December 31, 20202021 as compared to the year ended December 31, 2019,2020, to R$5,5275,692 million from R$5,1295,527 million, respectively. This increase is mostly explained by an increase in Depreciation of 4G Transmission Equipment and Rightright of Use,use, related to a larger Fixed Asset base from lease agreements.
Taxes, Fees and Contributions
Taxes, fees and contributions costs decreased by 2.1 %and expenses increased 3.4% in the year ended December 31, 2020,2021, to R$814842 million from R$832814 million in the year ended December 31, 2019, mainly impacted by the decrease in FISTEL expenses.2020. For further information, see “Item 4. Information on the Company—B. Business Overview—Taxes on Telecommunications Goods and Services.”
Rent and Insurance
Rent and insurance costs and expenses increased 1.4 %11.8% to R$492 million in the year ended December 31, 2021 from R$440 million in the year ended December 31, 2020 from R$434 million in the year ended December 31, 2019.2020. This low variationincrease is mainly 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, 2020 regarding the right to use the “TIM” brand. On December 10, 2020, our board of directors approved the renewal of such trademark license agreement.
Costs of Goods Sold
Our cost of goods sold decreased by 18.9%3.3%, from R$932 million in the year ended December 31, 2019 to R$756 million in the year ended December 31, 2020.2020 to R$731 million in the year ended December 31, 2021. This decrease is mainly related toreflects the closing of most of the Company’s physical stores, the main handset sales channel, from March to June, arising from the social distancing measures to fight the new coronavirus pandemic.efficiency on cost control execution, despite Brazil’s higher inflation.
Publicity and Advertising
Publicity and advertising costsexpenses increased 6.2%22.0% in the year ended December 31, 20202021 as compared to the year ended December 31, 2019,2020, to R$460 million from R$377 million, from R$355 million, respectively, reflecting another year markedmainly affected by the structural trends,return of more frequent advertising campaigns and higher expenses with efficiency gains from process digitalization and increased penetrationsales commissions.
Expected credit losses of digital channels more than offsetting increased marketing expenses related to more exposure in the media.
Losses on Doubtful Accountstrade accounts receivable
Losses on doubtfulExpected credit losses of trade accounts receivable, decreased 26.1%1.4%, to R$553544 million in the year ended December 31, 20202021 as compared to R$748553 million the year ended December 31, 2019,2020, reflecting the continuous efforts to enhance customer acquisition through more robust credit models and policies, as well as higher efficiency in collection and recovery.
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Others
Other costs and expenses decreased by 3.6%25.3% in the year ended December 31, 2020,2021, as compared to the year ended December 31, 2019.2020. For the year ended December 31, 2020,2021, those other costs amounted to R$9168 million, compared to R$9591 million for the year ended December 31, 2019.2020.
Other Income (Expenses), Net
Other expenses,income (expenses), net, increasedchanged to an income of R$351498 million in expenses in the year ended December 31, 20202021 from an expense of R$1,275352 million in income in the year ended December 31, 2019.2020. This change was explained by a reduction on other operating revenues,mainly due to lower revenuesthe gain from late payment fines (the company stopped collecting finesthe sale of this nature when51% of our equity interest in I-Systems (formerly FiberCo) to IHS, in the pandemic beganamount of R$2,709 million, which is composed of the (secondary) cash paid to TIM S.A. and resumed collection in August) and lower revenue from suppliers’ credits.the fair value of the minority interest of 49% that remained with TIM S.A.
Operating Income to Net IncomeProfit for the year
The following table shows our net income, as well as the percentage change, for each of the periods indicated:
Year ended December 31, | Percentage change | ||
2020 | 2019 | 2020 – 2019 | |
(in millions of reais) | |||
Operating income | 2,803 | 4,515 | (37.9) |
Financial income (expenses) | (811) | 21 | n.a. |
Income and social contribution taxes | (164) | (914) | (82.0) |
Net income for the year | 1,828 | 3,622 | (49.5) |
Year ended December 31, | Percentage change | ||
2021 | 2020 | 2021 – 2020 | |
(in millions of reais) | |||
Profit before financial income (expenses) and income taxes | 3,756 | 2,803 | 34 |
Financial income (expenses) | (653) | (811) | 19 |
Income tax and social contribution | (146) | (164) | 11 |
Profit for the year | 2,957 | 1,828 | 62 |
Financial Income (Expenses)
In the year ended December 31, 2020,2021, financial expenses was R$811653 million, as compared to the R$21811 million in financial income in the year ended December 31, 2019,2020, this decrease is mainly explained by a lower revenue from monetary correction on PIS and COFINS credits, a lower volume of PIS and COFINS over Interest on Equity distributions (due to the merger of TIM Participações into TIM S.A.) and a lower volume of interest on financing, that exceeded the lower revenue from interest on financial investments. The last two accounts have declined on an annual comparison as a result of a lower SelicSELIC rate.
Income and Social Tax Contribution Taxes
Income tax and social contribution expenses totaled R$146 million in the year ended December 31, 2021, compared to an expense of R$164 million in the year ended December 31, 2020, compared to an2020. In 2021, although it was recognized a R$509 million expense of IRPJ and CSLL due to the sale of 51% of FiberCo's share capital in favor of IHS, TIM also registered (i) R$914535 million inof IRPJ and CSLL credits related to the year ended December 31, 2019. In 2019,STF decision that the IRPJ and CSLL are not levied on SELIC interest on the refund of overpaid taxes; and (ii) a positive impact of R$87 million arising from the write-off of assets and reversal of the provision for income tax and social contribution, taxes were impacted by the effect of PIS/COFINS creditsset up in 2009, due to the exclusionpartial success in an administrative proceeding related to the merger of ICMS from the calculation basis of PIS/COFINS, which increased earnings before income and social contribution taxescompany TIM Nordeste by R$3,024 million. In 2020, there was no such exclusion, soTIM Celular. Therefore, despite our earnings before income and social contribution taxes was higher than previous year, Income and Social Contribution taxes expenses was lower than previous year.2020. Important to mention that due to FiberCo transaction it was also recognized a positive impact of R$336 million of deferred taxes on goodwill. Nonetheless, such amount was registered as a reduction of the transaction cost, above Adjusted EBITDA, not as an income and social contribution expense.
Net IncomeProfit for the Year
As a consequence of the explanations above, our net income in the year ended December 31, 2020 was R$1,828 million, representing a decrease of 49.5% from a net income of R$3,622 million in the year ended December 31, 2019. This drop is explained by tax credits accounted for in 2019 as previously discussed, and also to the impacts of the COVID-19 pandemic on our operations results.
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:
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.
Our revenueprofit for the year ended December 31, 20192021 was R$17,3772,957 million, representing 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, 2018,61.7% from our profit of 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$9491,828 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
Year ended December 31, | Percentage change | ||
2019 | 2018 | 2019 – 2018 | |
(in millions of reais) | |||
Total revenue | 17,377.2 | 16,981.3 | 2.3 |
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.2020.
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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).
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
Year ended December 31, | Percentage change | ||
2019 | 2018 | 2019 – 2018 | |
(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 | (94.7) | (68.9) | 37.4 |
Total operating expenses | (14,137.9) | (14,280.5) | (1.0) |
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’ wages and salaries 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.
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, 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, lower income and indebtedness of families).
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 Income 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
Year ended December 31, | Percentage change | ||
2019 | 2018 | 2019 – 2018 | |
(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 | (913.9) | 664.9 | n.a. |
Net income for the year | 3,622.1 | 2,545.1 | 42.3 |
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 the Company) 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.
B. Liquidity and Capital Resources
In February 2020, as part of our liquidity 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 debt had a cost of 171% of the CDI at the time and no breakage costs were charged. At the same time, TIM S.A. obtained 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 with an average cost of 108.3% of the CDI. 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 three years (2020-2022) in the northeastern region of Brazil.
On the second quarter of 2020, due to global macroeconomic uncertainty regarding COVID-19 and its possible impacts, TIM S.A. entered in two new transactions with the objective to reinforce its cash position. The new loans were closed with The Bank of Nova Scotia in the amount of R$574 million and with BNP Paribas in the amount of R$426 million. The loans were disbursed on April 22, 2020 and on May 22, 2020 with a maturity of one year and one and a half year, respectively. Both transactions were denominated in U.S. dollars and closed with a post hedge cost of 155% CDI. The Bank of Nova Scotia loan matured in April 2021 and was fully repaid.
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.
Despite the fact that theThe cost of our debts has been increasing in terms of CDI, due to the macroeconomic changes in Brazil, in particular the hike of Brazil, speciallyBrazil’s base interest rate.
In order to strengthen our cash position, in May 2022, we signed a new agreement with Bank of Nova Scotia in the reductionamount of R$1,000 million with a post-hedge cost of 108.95% of CDI and a term of 1.6 years. Also, in May 2022, we disbursed part of the Brazil’s interest rate,available credit line with Banco do Nordeste do Brasil in the amount of R$249 million with an average post-hedge cost of 69.02% of CDI and a term of 5.9 years. In November 2022, we believedisbursed part of the FINEM credit line with BNDES in the amount of R$319.2 million at the cost of TJLP+1.95% p.a. and a term of 2.8 years. This operation has no hedge.
As of December 31, 2022, we have in nominal terms, the lowest debt cost of its history.sufficient working capital and other undrawn financing facilities to service our operating activities and ongoing investments.
Sources of Funds
Cash from operations
Our cash flows from operating activities waswere R$8,6749,429.1 million in the year ended December 31, 20202022 compared to R$7,06510,078.1 million in the year ended December 31, 2019, an increase2021, a decrease of 23%6.4% mainly explained by the initiatives relatedpayment of licenses and obligations relating to cost and expense reduction. It is important to note thatthe auction of frequencies in the first quarteramount of 2020, the FISTEL payment was postponed (aboutapproximately R$509 million) – usually due in March – to August 31, 2020. In the third quarter of 2020, the Company paid nearly R$300 million related to taxes in connection with Condecine and CFRP, negatively impacting Change in Working Capital and Cash Flow for such quarter. The remaining FISTEL (TFF) amount is still suspended, without a defined payment date. Therefore, the main reasons for the improvement in Change in Working Capital (excluding the previously mentioned non-cash effects related to PIS and COFINS credits), in addition to the suspension of FISTEL (TFF) payment, relates to an amount substantially less negative in Accounts Receivable, due to a significant improvement in the collection line in 2020, in addition to lower disbursements with legal and administrative proceedings. 2.5 billion.
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
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Negatives
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· | Judicial deposits increased R$603.8 million in the year ended December 31, 2022, compared to a decrease of R$215.7 million in the year ended December 31, 2021. |
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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. In the case of loans linked to the IPCA we enter into rate swaps to hedge against inflation variations.
As set forth below and as each agreement is described further in the following paragraph, in 2020, the Company2022, we obtained new loans totaling R$2.6 billion. The Company1 billion and, we requested disbursement of only R$1.8 billion568.3 million of these new loans and there were no disbursements of existingthe available credit agreements made in 2020.agreements.
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 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:
· | 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 the Company 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, |
· | Credit Agreement, dated as of May 2, 2018, between BNDES as lender and TIM Celular (now TIM S.A.) as borrower (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 2019 or 2020. In March 2019, Credit Line B was canceled and replaced by FINAME DIRETO (as defined below at next bullet). On November 4, 2022, the disbursement of the amount of R$311.4 million occurred (from Credit Line A) and R$7.8 million (from Credit Line C), both with cost of 1.95% plus the TJLP and term of 2.8 years. As of December 31, 2022, the total amount under this credit agreement was R$297.2 million. |
· | Credit Agreement, dated March 20, 2019, between Agência Especial de Financiamento Industrial S.A., or 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 maturity conditions: a fixed interest rate up to 1.44% plus the TLP and maturity up to 10 years. There were no additional costs to sign this loan and |
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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. |
· | Credit Agreement, dated |
· | Credit Agreement, dated as of April 1, 2021, between The Bank of Nova Scotia |
· | Deed of Indenture for the Issuance of Simple Unsubordinated Debentures, with Additional Personal Guarantee, Not Convertible into Shares, in a |
· | Credit Agreement, dated as of |
See Note 21 to 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 30, 2022, all of which have since matured and been repaid or have been prepaid by us:
· | Credit Agreement, dated as of May 22, 2020, between BNP Paribas, as lender and TIM S.A., as borrower, in the principal amount of R$426 million denominated in U.S. dollars and a term of one and a half year, bearing a cost of 155.0% 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.$76 million and, in connection with the required hedging, the execution of a Swap Agreement, dated as of May 22, 2020, between BNP Paribas, as lender, and TIM S.A., as borrower. Disbursement occurred on June 15, 2020. |
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 May 1, 2020, all of which have since matured and been repaid or have been prepaid by the Company:
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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). agreements expire after 5 years and no guarantees were issued. This loan was disbursed in December 2020, already matured and was fully repaid.
Funds From Subsidiaries
There are no material restrictions on theour ability of our subsidiaries to transfer funds to the Companyus 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, 2020,2022, were payment of dividends to our shareholders, capital expenditures, business combination and loan repayments.
Material Capital Expenditures
Our capital expenditures in 2020, 20192022, 2021 and 20182020 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) of equipment purchases 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 long-lived assets for the years ended December 31, 2020, 20192022, 2021 and 2018:2020:
Capital Expenditures Categories
Year ended December 31, | Year ended December 31, | |||||
2020 | 2019 | 2018 | 2022 | 2021 | 2020 | |
(in millions of reais) | (in millions of reais) | |||||
Network | 2,739.6 | 2,823.7 | 2,732.3 | 3,449 | 3,052 | 2,740 |
Information technology | 828.4 | 775.0 | 720.6 | 704 | 724 | 828 |
Licenses | 32.1 | (82.1) | 98.9 | 175 | 3,609 | 32 |
Other | 291.1 | 336.4 | 279.3 | 403 | 581 | 291 |
Total capital expenditures | 3,891.3 | 3,853.0 | 3,831.1 | 4,730 | 7,966 | 3,891 |
(1) The material capital expenditures discussed in this section are reoccurring operational in nature and exclude non-reoccurring capital expenditures, like the Oi acquisition.
In 2022, total capital expenditure was R$4,730 million. In 2021, total capital expenditure was R$7,966 million (or R$4,382 million excluding the investment related to the 4G and 5G auction held in November 2021). From a cash flow point of view, in December 2021, the capital expenditure recorded for licenses and related obligations regarding the previously mentioned 4G & 5G auction held in November 2021 was R$3,584 million, which of the amount of R$ 2,682 million was recorded as a contra entry to commitments payable and R$ 902 million with cash impact. 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 paid (net of income taxes) by us to our shareholders during the years ended December 31, 2020, 20192022, 2021 and 2018:2020:
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Dividend Distribution
Year ended December 31, | Year ended December 31, | |||||
2020 | 2019 | 2018 | 2022 | 2021 | 2020 | |
(in millions of reais) | (in millions of reais) | |||||
Dividends | — | 600.0 | — | |||
Interest on shareholders’ equity (net of withholding tax) | 920.5 | 846.1 | 724.2 | 1,400.0 | 1,047.5 | 920.5 |
Total distributions | 920.5 | 846.1 | 724.2 | 2,000.0 | 1,047.5 | 920.5 |
On March 30, 2021,2023, our shareholders voted to approve the distribution of R$920.52,000 million as interest on shareholders’ equity in accordance tosurpassing the minimum required by Brazilian Law, with respect to our 20202022 results. The amounts indicated in the table above for 20192021 and 20182020 were approved at the annual general meeting in 20202022 and 2019,2021, respectively. The amount of withholding taxes was R$162.4197.0 million. The mountsamounts paid were R$425560 million in 20202022 and R$495.51,803 million in 2021.2023.
Funding and Treasury Policies
The Company maintainsWe maintain a general policy of continually monitoring itsour financial position and treasury activities in order to ensure solid fiscal control. Oi’s mobile assets acquisition new funding transactions. In accordance with our funding and treasury policy, we will continue to monitor the market in order to take advantage of suitable instruments to finance our industrial Plan. We expect future financing to balance maturity, cost and TIM’s payment capacity.
Leverage
Management tracks the ratio of Net Debt to Adjusted 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, Adjusted 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 affectingthat affects our success, as indebtedness may be required to make investments necessary to grow the Company’sour business. We believe that our current financial leverage index, Net Debt to Adjusted 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 Adjusted EBITDA because Adjusted EBITDA in particular may be calculated differently from company to company, leading to financial leverage indexes that are not comparable. Accordingly, any such comparison may be misleading.
The following table sets forth our financial leverage index for the reported periods:
2022 | 2021 | 2020 | |
(in millions of reais) | |||
Total borrowing and derivatives (Notes 20 and 37) | 4,462 | 3,398 | 1,879 |
Lease – Liabilities (Note 16) | 12,832 | 9,064 | 8,379 |
Lease – Assets (Note 16) | (239) | (243) | (162) |
Less: Cash and cash equivalents (Note 4) | (2,549) | (5,229) | (2,575) |
FIC (Investment Fund) (Note 5) | (2,203) | (4,568) | (2,203) |
Net debt (non-GAAP) (unaudited) | 12,302 | 2,422 | 5,450 |
Adjusted EBITDA (non-GAAP) (unaudited)(1) | 10,049 | 9,459 | 8,333 |
Financial leverage index (non-GAAP) (unaudited) | 1.33 | 0.39 | 0.65 |
(1) The EBITDA reconciliation presented in the consolidated financial statements was presented in line with the restrictive clauses set forth in the BNDES’ financing contract mentioned in the note 21 to the consolidated financial statements.
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2020 | 2019 | 2018 | ||
(in millions of reais) | ||||
Total borrowing and derivatives (Notes 19 and 36) | 1,879 | 1,987 | 1,593 | |
Leasing – Liabilities (Note 15) | 8,379 | 7,781 | 1,940 | |
Leasing – Assets (Note 15) | (162) | (156) | (208) | |
Less: Cash and cash equivalents (Note 4) | (2.575) | (2,285) | (1,076) | |
FIC (Investment Fund) (Note 5) | (2.070) | (654) | (785) | |
Net debt | 5,450 | 6,672 | 1,465 | |
EBITDA | 8,333 | 9,645 | 6,372 | |
Financial leverage index | 0.65 | 0.69 | 0.23 |
A reconciliation of our net incomeprofit for the year to Adjusted EBITDA, as well as a further explanation of the calculation of our financial leverage index, is also presented in Note 3639 to our consolidated financial statements.
We believe that using Adjusted 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. Adjusted EBITDA is calculated by adding back interest, taxes,financial income (expenses) (including foreign exchange variations), income tax and social contribution, depreciation and amortization expensecosts and expenses and share of loss of an associate to net income.profit for the year.
Tabular Disclosure of Contractual Obligations
The following is a summary of our contractual obligations (in presente value) as of December 31, 2022:
Payments Due by Period as of December 31, 2022 | |||||
Less than | 1-3 years | 4-5 years | More than | Total | |
(in millions of reais) | |||||
Total borrowings (post-hedge)(1) | 1,369 | 1,497 | 773 | 822 | 4,462 |
Leases – IFRS 16(2) | 2,136 | 2,729 | 1,721 | 3,970 | 10,556 |
Leasing (previous IAS 17 finance leases) | 91 | 195 | 247 | 1,504 | 2,037 |
Total(3) | 3,595 | 4,422 | 2,741 | 6,296 | 17,055 |
(1) | Considering the balances related to derivative financial instruments as of December 31, 2022. |
(2) | Leases in which we, as the lessee, substantially hold all of the risks and benefits of ownership 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 statement of income as financial expense 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.
SISTEL and TIMPREV
We and TIM Celular (which was 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.
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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, we, like other companies, created in 2022, as a result of the former Telebrás system, 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 our 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 (“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. 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 NBC TG 33 (R2) - Benefícios a Empregados (IAS 19 – Employee Benefits) issued by the Federal Accounting Council - CFC and approved by CVM Deliberation 695/2012, after revoked by CVM Resolution 110/2022 (CVM Resoltution 110/2022), 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.
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.
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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 addition to the plans coming from the TELEBRÁS system, there is also the plan administered by the CESP foundation resulting from the incorporation of AES Atimus.
AES Telecom: Supplementary pension and pension plan's installment, administered by the CESP Foundation, which is the responsibility of the company, with a view to the acquisition of Eletropaulo Telecomunicações Ltda. (“AES Atimus”), succeeded by TIM Fiber SP LTDA, later incorporated into TIM Celular which was incorporated by us.
Medical care plan Fiber: Provision for maintenance of health plan as post-employment benefit to former employees of AES Atimus (as established in Law No. 9,656/98, articles 30 and 31), which was acquired and incorporated by TIM Celular and which was subsequently incorporated by us.
In 2022, contributions to the pension plans mentioned above totaled R$1.1 million, compared to R$1.2 million in 2021).
C. Research and Development
ResearchSISTEL and DevelopmentTIMPREV
We do not independently develop new telecommunications hardware and depend uponTIM Celular (which was merged into TIM S.A. in connection with the manufacturersReorganization) have sponsored a private defined benefit pension plan for a group of telecommunications productsTelebrás 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.
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Given that in 1999 and 2000 the sponsors of the pension plans managed by SISTEL had already negotiated conditions for the developmentcreation of new hardware.
Patentsindividual pension plans for each sponsoring company and Licenses
We hold no material intellectual property assets. Telecom Italia owns the rightsmaintenance of joint liability only in relation to the “TIM” trade name,participants already assisted on January 31, 2000, we, like other companies, created in 2022, as a result of the former Telebrás system, 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 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 businessprovide for new conditions for granting and operating results”.
D. Trend Information
COVID-19
Throughout 2020, there were 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,maintaining benefits, as well as the effectrights and obligations of governmental regulations imposed in responsethe Plan Managing Entity, the sponsoring companies, participants and the beneficiaries thereof.
Under this new plan, the sponsor’s regular contribution will correspond to the pandemic.
As COVID-19 continues to spread, we are taking100% of a variety of measures toparticipant’s basic contribution, and TIMPREV’s managing entity will ensure the availability of our telecommunications services, promotebenefits listed below, under the safetyterms 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 our employees have migrated to TIMPREV, the pension and supporthealth care plans deriving from 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 thatTELEBRÁS system listed below remain in our headquarters or stores. We have also implementedforce:
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 contingencymulti-sponsored pension plan for our customer service call centers with modified call distribution logicinactive employees;
Convênio de Administração: for managing pension payments to retirees and remote working for a portion of services. Our information technology teams are testing remote work processes and infrastructure for all activities except thosepensioners of the technical roompredecessors of our data center, which requires physical access.the subsidiary companies; and
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 growthPAMEC/Apólice de Ativos: health care plan for pensioners of the predecessors of the subsidiary companies.
As happened with the Termo de Relação Contratual Atípica (“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. 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 NBC TG 33 (R2) - Benefícios a Empregados (IAS 19 – Employee Benefits) issued by the Federal Accounting Council - CFC and approved by CVM Deliberation 695/2012, after revoked by CVM Resolution 110/2022 (CVM Resoltution 110/2022), 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.
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.
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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.
Customer Base and Market Share
In the year ended December 31, 2020, our subscriber base decreased 5.5% to 51.4 million customers, which represented a market share of 22%, compared to 54.4 million customers and 24% of market share in 2019. 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.”
With respect to the composition of our customer base, the postpaid segment accounted for 42.4% of our total subscriber base in the year ended December 31, 2020, compared to 39.4% 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 57,6% of our customer base at the end of 2020, compared to 60.6% in 2019, due to the disconnection of 3.4 million lines in the year, and which reflected a downturn, result of a significant reduction in the segment’s churn.
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, impacted by the COVID-19 pandemic, 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.”
In 2020, 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, impacted our operations and the amount and ways our customers use our networks and other products and services. In addition, COVID-19 affected and continues to 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 increased the demand for our products and services, while others decreased demand or made it
more difficult for us to serve our customers, such as closing certain of our retail locations. Due to the speed with which the situationThe PBS Assistidos plan continues to develop, we are not able at this time to estimatebe managed by SISTEL. The only exception is Plano PAMEC, which was extinguished, with the impact of COVID-19 on our financial or operational results, but the impact could be material. See “Item 5. Operating and Financial Review and Prospects——A. Operating Results ——Results of OperationsCompany remaining responsible for the Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019”
Monthly Average Revenue Per User (ARPU)
TIM’s monthly ARPU was R$24.9 in the year ended December 31, 2020, an increase of 4.9% when compared to a monthly ARPU of R$23.7 for the year ended December 31, 2019, largely due to the maintenancecoverage of the company's successful efforts to monetize its customer base through migrations to higher value prepaid and postpaid plans .
Competitive Environment
Brazil’s mobile telecommunications marketrespective benefit, which is in a mature stage and is subject to a competitive landscape that is almost unique in the world. Brazil is one of the few markets with four nationwide competitors (Claro, Oi, TIM e Vivo), each with a market share between 16% and 33%. After struggling to leave bankruptcy protection for four years, the fourth player (Oi) has decided to sell its mobile operations. TIM, in alignment with its values of acting as an engine of growth and for the development of differentiated and quality services at fair and competitive prices, joined forces with other operators to purchase such Oi’s operations. With this strategy, TIM is looking for a more balanced and healthy competitive market; improving the quality and experience of service for its and Oi’s customers; obtaining synergies by improving asset utilization; optimizing its portfolio; strengthening its technological innovation and ensuring profitability for its shareholders. Probably, Oi’s restructuring will mean the most important consolidation movement in years for the Brazilian telecommunications market.
In 2020, 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$45,70 per gross add for the year ended December 31, 2020, compared to approximately R$51.70 per gross add in the year ended December 31, 2019. The decrease of 11.6% year over year is primarily due to more efficient selling and marketing costs. with the increase in SAC, the SAC to ARPU ratio, which indicates the return per client, fell year over year, reaching 1,7 month in 2020.now called PAMEC/Apólice de Ativos.
In addition to competitionthe plans coming from other traditional mobile telecommunications service providers, the levelTELEBRÁS system, there is also the plan administered by the CESP foundation resulting from the incorporation of competition from landline service providers has increased,AES Atimus.
AES Telecom: Supplementary pension and itpension plan's installment, administered by the CESP Foundation, which 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 developmentresponsibility of the fifth generation are expectedcompany, with a view to introduce additional sourcesthe acquisition of competition.Eletropaulo Telecomunicações Ltda. (“AES Atimus”), succeeded by TIM Fiber SP LTDA, later incorporated into TIM Celular which was incorporated by us.
In orderMedical care plan Fiber: Provision for maintenance of health plan as post-employment benefit to provide mobile telecommunications services over additional bandwidth frequencies to accommodate these emerging technologies, it is expected that Anatel will auction licenses in the second half of 2021. Even before COVID-19, the 5G spectrum auction schedule had been postponed from its initial date (March 2020).
Spectrum will be auctioned in the 700 MHz, 2.3 GHz, 3.5 GHz and 26 GHz bands. Not all of this capacity will be used for 5G. The spectrum to be auctioned at 700 MHz is the remainder of 2014 bid.
E. Off-Balance Sheet Arrangements
None.
F. Tabular Disclosure of Contractual Obligations
The following is a summary of our contractual obligations as of December 31, 2020:
Payments Due by Period as of December 31, 2020 | |||||
Less than | 1-3 years | 4-5 years | More than | Total | |
(in thousands of reais) | |||||
Total borrowings (post-hedge)(1) | 1,434 | 558 | (113) | — | 1,879 |
Leases – IFRS 16(2) | 999 | 2,038 | 1,479 | 2,201 | 6,717 |
Leasing (previous IAS 17 finance leases) | 50 | 103 | 134 | 1,212 | 1,500 |
Total(3) | 2,483 | 2,699 | 1,500 | 3,413 | 10,096 |
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 employedAES Atimus (as established in Law No. 9,656/98, articles 30 and 31), which was acquired and incorporated by us after December 1999.TIM Celular and which was subsequently incorporated by us.
In November 2002, we created a separate defined contribution plan, or the TIMPREV Pension Plan. Migration to this plan was optional for employees linked2022, contributions to the PBS Plan. Migrationpension plans mentioned above totaled R$1.1 million, compared to the TIMPREV Pension Plan extinguishes the migrating participant’s rights under the PBS Plan.R$1.2 million in 2021).
C. Research and Development
SISTEL and TIMPREV
The CompanyWe and TIM Celular (which has beenwas 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.
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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,we, like other companies, created in 2022, 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’our 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,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.Company. 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-26NBC TG 33 (R2) - Benefícios a Empregados (IAS 19 – Employee Benefits) issued by the Institute of Independent Auditors of Brazil – IBRACON,Federal Accounting Council - CFC and approved by CVM Deliberation 695/2012, after revoked by CVM Resolution No. 371,110/2022 (CVM Resoltution 110/2022), 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.
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.
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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 addition to the plans coming from the TELEBRÁS system, there is also the plan administered by the CESP foundation resulting from the incorporation of AES Atimus.
AES Telecom: Supplementary pension and pension plan's installment, administered by the CESP Foundation, which is the responsibility of the company, with a view to the acquisition of Eletropaulo Telecomunicações Ltda. (AES Atimus)(“AES Atimus”), succeeded by TIM Fiber SP LTDA, later incorporated into TIM Celular which was incorporated by the Company.us.
Medical care plan Fiber: Provision for maintenance of health plan as post-employment benefit to former employees of AES Atimus (as established in Law No. 9,656/98, articles 30 and 31), which was acquired and incorporated by TIM Celular and which was subsequently incorporated by the Company.us.
In 2020,2022, contributions to the pension plans mentioned above totaled R$1.21.1 million, compared to R$1.31.2 million in 2019)2021).
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
COVID-19
The COVID-19 pandemic continued to have an impact throughout the 2022 financial year, as society and commerce slowly began to return to normality. Amid increased vaccination, the emergence of new variants of the virus until mid 2022, escalating inflation and rising interest rates, our business proved to be resilient in delivering solid results by late 2022.
In our view, the COVID-19 pandemic increased demand for connectivity and the telecommunications sector has taken advantage of it. As a result, we believe we can be considered a more resilient company, not only due to data consumption growth, but because we have been honing our market vision and execution capacity to create long-term value.
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 variants, 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, pandemics and outbreaks, such as COVID-19, which may have material adverse effects on our business, financial condition, results of operations and cash flows.”
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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.
Customer Base and Market Share
In the year ended December 31, 2022, our subscriber base increased 20.0% to 62.5 million customers, compared to 52.1 million customers in 2021, reflecting the addition of customers as a result of the Oi Transaction in April 2022. With respect to the composition of our customer base, the Postpaid segment accounted for 43.6% of our total subscriber base in the year ended December 31, 2022, compared to 43.9% from a year ago. The prepaid segment represents 56.4% of our customer base at the end of 2022, compared to 56.1% in 2021.
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
We managed to maintain a good level of annual growth in service revenue and 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.
Among the initiatives put into place in 2022 that supported this performance, the following stand out the most; (i) the ongoing evolution of the volume-to-value approach, maintaining a high level of ARPU and upselling to our customer base; (ii) expansion of the network, consolidating TIM as having the largest mobile coverage in Brazil with the launch of 5G, which was made available in all of Brazil’s state capitals, and maintaining leadership in 4G; (iii) the solid execution of our ultra-broadband operation, with the rebranding of the service (TIM UltraFibra) and the expansion of fiber; (iv) the continuous advancement of our network and IT infrastructure; (v) the incessant pursuit of cost efficiency and investment efficiency despite the scenario of high inflation in the first half of the year; and (vi) the ongoing evolution of our customer platform strategy, materialized by partnerships in different verticals such as financial services, digital education, digital security and mobile advertising.
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.”
Average Monthly Revenue Per User (“ARPU”)
Mobile ARPU (Average Monthly Revenue Per User) was R$26.1 for the year ended December 31, 2022, a decrease of 0.9% as compared to the year ended December 31, 2021. The result reflects dilution from the addition of customers arriving from Oi which had a lower ARPU. These effects were partially offset in the fourth quarter of 2022 as a result of a customer base clean-up carried out in November of the silent lines that came from Oi. The segments’ ARPU, which excludes other mobile revenues and Customer Platform, decreased by 2.5% YoY in Postpaid (R$37.5) and increased by 1.1% YoY in Prepaid (R$13.1). We understand this is a relevant profitability metric that allows comparability with other peers in the telecommunication sector, calculated by dividing mobile services revenues by the average monthly customer base.
Competitive Environment
Brazil’s mobile telecommunications market is in a mature stage and remains subject to a competitive landscape, especially with the recent launch of the 5G ecosystem and the closing the sale and division of Oi's mobile assets among us, Vivo and Claro.
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On April 20, 2022, jointly with Telefônica Brasil S.A. and Claro S.A., we announced the closing of our acquisition of the mobile assets of Oi Móvel S.A.’s (“Oi Móvel”). Following the closing, we began to integrate Oi’s customer network. In June, 2022, we concluded the “roaming like” phase of the integration, which is when customers arriving from Oi begin to access our network, in roaming mode, when coverage is otherwise not available, therefore offering them a better user experience. The next stage, which started in September 2022, was the beginning of the customers migration, which is being carried out in phases.
In alignment with our values of acting as an engine of growth and for the development of differentiated and quality services at fair and competitive prices, we purchased part of Oi’s mobile operation assets. With this strategy, we reinforced that we are looking for a more balanced and healthy competitive market; improving the quality and experience of service for our and Oi’s customers; obtaining synergies by improving asset utilization; optimizing our portfolio; strengthening our technological innovation and ensuring profitability for our shareholders.
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 the expected growth of 5G in the coming years, may introduce additional sources of competition.
In order to provide mobile telecommunications services over additional bandwidth frequencies to accommodate these emerging technologies, Anatel auctioned licenses in November 4, 2021. Blocks were auctioned across four frequency bands: 700MHz, 2.3 GHz, 3.5GHz and 26GHz over a 20-year period. The 5G technology, offered mainly through the 3.5 GHz band and also through the 26 GHz band, was deployed across Brazilian state capitals between July and October of 2022. The 5G standard coverage will be expanded gradually, with a plan of reaching all Brazilian municipalities by December 31, 2029.
Through the 5G spectrum auction, in addition to the major market participants (Vivo, Claro and TIM) and established regional players (Algar Telecom and Sercomtel), new entrants secured licenses, which will boost investments, coverage and competition. There is also the 700MHz band of the spectrum and the remaining of the 2014 bid, that can still be leveraged to contribute to network capacity for all providers, especially for new entrants, since the winner of this auction (Winity Telecom) already made clear its intention to use its capacity to provide a neutral network (in August, 2022, Winity Telecom inked a wholesale contract with Vivo).
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 offerings such as voice services (mobile and fixed), broadband and other services.
In recent years, a mixture of organic growth and strategic acquisitions was observed in the Brazilian broadband sector, resulting in the growth of the number of strong market participants, each eager to expand and strengthen their regional presence across the country. As the market is still fragmented, there is room for gains, which may continue to induce interest from other groups to undertake a similar strategy (such as regional providers continuing to add new acquisitions to their post-IPO portfolio by acquiring smaller ISPs to complement their existing footprint). One of the main opportunities for ISPs in the mobile market will be for ISPs to leverage their current broadband customer base with bundle offers combining their existing broadband offering with mobile offerings that utilize the mobile neutral network.
There is also competition from other services outside the telecommunications industry, such as the global and local OTT providers who offer content and services based on the Internet, including voice calls and messaging without paying for network infrastructure. OTT applications have become so important to customers that in many cases they are bundled as free services by mobile operators. OTT communication apps have a business model that demand increased network traffic, but telecommunications companies are the ones required to finance and undertake the network infrastructure investment required to address the increased Internet traffic which comes from OTT applications.
In line with our growth strategy of services beyond connectivity, we launch ourselves into new markets with their own unique competitive environments. As such, this new approach of being an orchestrator of a digital partners ecosystem requires us to develop new capabilities and agility to adapt to new markets.
E. Critical Accounting Estimates
For information about our critical accounting estimates, see our audited consolidated financial statements included elsewhere in this annual report.
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. The Board of Directors has four special advisory committees: the 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 shall meet regularly at least six (6) and up to twelve (12) times per year, and whenever called for a special meeting by its Chairman, by any 2 (two) Directors or by the Company’s 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 three special advisory committees: the Compensation Committee (Comitê de Remuneração), the Control and Risks Committee (Comitê de Controle e Riscos) and the Environmental, Social & Governance Committee (“Comitê de Environmental, Social & Governance”), all 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.
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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 Resolution 44/2021. The Board of Directors is composed of five to nineteen members, each serving for a two-year term with the possibility of re-election. All decisions taken by our Board of Directors are recorded in the board’s minute books. The Board of Directors shall meet regularly at least six (6) and up to twelve (12) times per year, and whenever called for a special meeting by its Chairman, by any two Directors or by our 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.
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 2021:2023:
Name | Title | Date of Birth | Date Appointed |
Nicandro Durante | Chairman | September 13, 1956 | March 30, |
Director | March 30, | ||
Director | March 30, | ||
Herculano Aníbal Alves | Director | February 27, 1953 | March 30, |
Elisabetta Paola Romano | Director | April 1, 1963 | March 30, |
Gesner José de Oliveira Filho | Director | May 17, 1956 | March 30, |
Flavia Maria Bittencourt | Director | January 15, 1970 | March 30, |
Michele Valensise | Director | April 3, 1952 | March 30, 2023 |
Michela Mossini | Director | March 30, | |
Director | March 30, |
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 were re-elected at the annual shareholders’ meeting held in 2021.2023.
Set forth below are brief biographical descriptions of the members of our Board of Directors:
Nicandro Durante.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 (Pontifí(Pontifícia Universidade Católica)lica), 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 atChief Executive Officer of Reckitt Benckiser, a leading company in the health and care industry, and Chairman of TIM S.A.’s Board of Directors, Compensation Committee and Environmental, Social & Governance Committee.
Carlo Nardello. Claudio Giovanni Ezio Ongaro. Mr. NardelloOngaro is an Italian citizen, born in Rome,Milan, Italy, with a University Degree in Economics issuedElectronic Engineering awarded in 19881993 by LUISS (Libera Università Internazionale degli Studi Sociali).Politecnico di Milano, Milan Italy. Mr. Nardello has over 20 yearsOngaro carried out his career in the telecommunications sector, holding managerial roles both in Italy and abroad, mainly in the United Kingdom, South America, Greece and the Middle East. In particular, he began his career in 1995 in Omnitel Pronto Italia by participating in the founding of the company with roles of increasing responsibility within the network. After an experience in the industryinfrastructure services market, in 2003 he worked in Cable & Wireless as Group Technical Director of broadcastingMobile and, communications.subsequently, as Senior Director of Strategy. In 2007, he joined the Orascom Group, initially in the wireless broadband field and later in the subsidiary Wind Hellas as Chief Strategy Officer and Chief of Fixed Business. From 2010 he worked in Wind Telecomunicazioni as Head of Strategy and M&A and subsequently, following the merger with H3G in 2016, in WindTre as CEO Office Director, responsible for coordinating the company's main strategic projects. He joined TIM Group in 2019. On January 7, 2019,December 2021, he was appointed Chief StrategicStrategy & Business Development & Transformation Officer at Telecom Italia S.p.A. 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 ItalianaTIM 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. whilst maintaining his previous responsibility as Head of Wholesale Market.
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Alberto Mario Griselli. Mr. Nardello is currentlyGriselli holds a Professor of Digital Marketing atdegree in Electronic Engineering from La Sapienza University in Rome Professor of Media Economics at LUMSA Universityand an MBA 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, Business Development and Transformation Officer at Telecom Italia S.p.A (the Italian TLC incumbent) since January 2019. He was Chairman of the Board of TIM Vision S.r.L.finance from March 2019 to October 2020, and has been Chairman of the Board of TIM Ventures S.r.L. and a board member of Inwit S.P.A. since May 2019. From March 2019 to August 2020 Ms. Nardello has been a member of TIM Participações S.A’s Board of Directors and, from April 2019 to August 2020, he has been a member of TIM Participações S.A’s Compensation Committee. Since 2019 Mr. Nardello occupies the position of Board member of TIM S.A. and since 2020, the position of member of its Compensation Committee and of Environmental, Social & Governance Committee.
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.Columbia University. With over 25 years ofmore than 20-years’ experience in the telecommunicationstelecom sector, Mr. Labriola assumed the position of Chief Operating Officerhe held relevant positions such as Vice President for LatAm at TIM, Participações between December 2015a global provider of mobile engagement solutions for telecommunication operators, 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 for Brazil at Value Partners, a management consulting global firm. Across his professional career, Mr. Griselli worked in most of TIM S.A. between February 2017the aspects critical to companies’ performance, with projects ranging from strategic planning to customer segmentation, value proposition definition, offer design, pricing 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,promotions, go-to-market approach and customer experience. Mr. Labriola held positions as Marketing Director and Business Director at Infostrada Serviços de Comunicações Fixas. Mr. LabriolaGriselli took office as Chief ExecutiveRevenue Officer of TIM Participações on April 3, 2019; as Chairman of the Board ofand TIM Participações on April 1, 2019; as Chairman of the Board of TIM Brasil Serv. e Part. S.A. on July 2, 2019; as30, 2019 and Chief Executive Officer of TIM S.A. on May 15, 2019;January 31, 2022. On January 31, 2022, he was appointed as our CEO. On February 1, 2023, he assumed the roles on an interim basis as Investor Relations Officer and as memberChief Financial Officer, the latter of the Board of TIM S.A.which he held until a replacement was appointed on October 29, 2019.February 27, 2023.
Herculano Aníbal Alves.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, alternate member of the Fiscal Council of Gerdau S.A., and of the Financial and Risks Committee of Marfrig. He is also a Board member of TIM S.A. and of its advisory committees, namely, the Statutory Audit Committee(asCommittee (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 Paola Romano.Romano. Ms. Romano is an Italian citizen, born in Milan, Italy, with a Master in Computer Science issued byfrom 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. From November 2019 to August 2020 Ms. Romano has been Chief Innovation & Partnership Officer in TIM S.p.A. SinceFrom July 2020 to October 2022, she is currentlyhas been Chief Executive Officer of Telecom Italia Sparkle S.p.a.. She wasS.p.A. Since October 2022 she is the Chief Network, Operations & Wholesale Office of Telecom Italia S.p.A. Ms. Romano has been a board member of TIM Participações S.A.’s Board of Directors from March 2019 to August 2020. Since August 2020 Ms. Romano has been a member of TIM S.A’sS.A.’s Board of Directors.
Gesner José de Oliveira Filho.Filho. Mr. Oliveira is a partner of GO Associados and Professor of Economics at Getulio Vargas Foundation. He has been certified as a Member of the Audit Committee (CCoAud and IBGC) by the Brazilian Institute of Corporate Governance obtained on December 10, 2020. His expertise includes public and private entities. At present, he is a member of TIM 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 and of the Environmental, Social & Governance Committee. He is also a member of the Board of Directors of Braskem and Coordinator of itsthe Statutory Compliance and Audit Committee, a memberChairman of the Board of Directors of Iguá Saneamento S.A. and Estre Ambiental, as well as a member of the Self-Regulation Council of FEBRABAN. His pastprevious experience in Boards included being a member of the Board of Uber, Usiminas, Sabesp, CESP, Nossa Caixa and Varig. In addition, Mr. Gesner iscurrently participates, on a pro bono basis, in the Brazilian Institute of Ethics in Competition (ETCO), Centro de Integração Empresa Escola (CIEE), and member of the Advisory Board of AdministrationClimate Policies and Actions of Iguá Sustainability Institute, and CIEE, nonprofitable institutions.the Executive Secretariat for Climate Change (SECLIMA), of the Municipal Government Secretariat of the city of São Paulo. 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 He recently won 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.Jabuti Award for his book Nem Negacionismo, since April 2017. He was a board member of TIM Participações and of its advisory committees, namely, the Compensation Committee and the Control and Risks Committee from April 2018 to August 2020. Since 2020 he is a member of the Board of Directors and of the Control and Risks Committee of TIM S.A.Nem Apocalipse – Economia do meio ambiente: uma perspectiva brasileira.
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Flavia Maria Bittencourt.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,September 2021, she is the CEO of Adidas Brazil.Latin America. Until 2019, she was an independent board member of Marisa Lojas S.A., and currently holds the position of board member, both at BRF S.A. since April 2020, and at Grupo Oncoclínicas since 2021. Mrs. Bittencourt was an independent member of TIM Participações S.A.’s Board of Directors and Statutory Audit Committee from July 2019 to August 2020. Since 2020, she has been an independent member of TIM S.A.’s Board of Directors and Statutory Audit Committee
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. From February to August 2020 Ms. Di Bartolomeo was a member of TIM Participações S.A’s Board of Directors and of the Control and Risks Committee. Since 2020 Ms. Di Bartolomeo has been a member of TIM S.A’s Board of Directors, of the Control and Risks Committee and of the Environmental, Social & Governance Committee.
Michele Valensise.Valensise. Mr. Valensise, Italian citizen, born in Polistena, Italy, with a degree in Law by University of Rome – La Sapienza. After various assignments at the Italian Ministry of Foreign Affairs and abroad (Brazil, Germany, Lebanon, European Union), he was appointed Head of the Press Service, Spokesman and Chief of Staff of the Minister of Foreign Affairs. He was assigned as Italian Ambassador to Sarajevo, Brasilia and Berlin. From 2012 to 2016, he was Secretary-General of the Farnesina. He has been Vice Chairman of Astaldi S.p.A., leading company of the infrastructure sector, until July 2020. CurrentlyIn addition, he is memberwas a Member of the Board of Directors of Astaldi S.p.A. until April 2021 and is currently a Member of the Board of Directors of Webuild S.p.A. Since 2017 he ishas been Chairman of the German-Italian Centre for the European Dialogue (Villa Vigoni) holding a close relationship with Germany. He is an editorialist of the Italian newspaper “La Stampa” and of “Huffington Post”. From May 2018 to March 2021, he was member of the Board of Directors and member of the Nomination and Remuneration Committee and of the Control and Risk Committee of Telecom Italia S.p.A and he is currently member of the Board of Directors and of the Control and Risks Committee and Compensation Committee of TIM S.A.
Michela Mossini, Ms. Mossini holds a degree in Economics issued by the University of Rome “La Sapienza”. She has over 20 years of experience in the communications industry. After gaining experience working at Enel (Italy's largest energy provider), she developed her career at Telecom Italia S.p.A., Italy’s incumbent and largest provider of telecommunications services, where she held positions of increasing responsibility in the administration and control area, with a focus on planning and control activities. From September 2021 to December 2021 she was Chief Financial Officer of Telecom Italia Sparkle, a subsidiary of Telecom Italia offering a full range of ICT solutions, global connectivity, services and resources to enterprises, Internet service providers, OTTs, media and content players, application service providers, as well as fixed and mobile operators. In December 2021, she was appointed Head of Group Planning and Control at Telecom Italia S.p.A.
Adrian Calaza. Mr. Calaza holds a degree 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 of Telecom Italia S.p.A. on March 1, 2022. Before that, he held the position of Chief Financial Officer of ARCOR Group since August 2021 and, since September 2016, as Chief Financial Officer of TIM Participações (now TIM S.A.). Prior to that, he served as Chief Financial Officer at Telecom Argentina from 2009 to 2016, where he was also Corporate Administrative Services Manager from 2007 to 2009. Previously, Mr. Calaza held various executive positions, including Capital Expenditures and Control Manager at TIM Participações from 2006 to 2007, Chief Financial Officer at Telecom América Latina S.A. from 2004 to 2005 and Chief Financial Officer at 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.
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),and (7) Chief Technology Information Officer; and (8) Chief RevenuePeople, Culture & Organization 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 untilfor two years from the first meetingdate of the Board of Directors to be held after the 2022 annual shareholders’ meeting:
appointment.
Name | Title | Date of Birth | Date Appointed | |
Chief Executive Officer | April | March 31, 2023 | ||
Chief Financial Officer | July 1, 1971 | March | ||
Bruno Mutzenbecher Gentil | Business Support Officer | January 20, 1969 | ||
Mario Girasole | Regulatory and Institutional Affairs Officer | June 8, 1968 | ||
Legal Officer | June 5, 1970 | March | ||
September |
Brief biographical descriptions of our statutory officers are set forth below.
Pietro Labriola.Alberto Mario Griselli. See “—Board of Directors.”
Adrian Calaza.Andréa Palma Viegas Marques.Mr. Calaza Mrs. Marques is an Argentine citizen, graduateda senior executive with more than 20 years of experience in business administration from the University of Belgranofinancial sector working in national markets and holds an MBAmultinational companies headquartered in Managementthe United States, Mexico, Italy and the United Kingdom. Mrs. Marques has a degree in Business Administration from theCândido Mendes University, and a Master of CEMA. With extensive experience in the telecommunications industry, Mr. Calaza was elected Chief Financial Officer in TIM Participações in September 2016. Before that, he held the position of Chief Financial Officer in Telecom ArgentinaBusiness Administration 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 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.Ibmec.
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 most of the aspects critical 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 and TIM S.A. on July 30, 2019.
Mario Girasole. Mr. Girasole hasholds a PhD in Economics from the university of Perugia and a Laurea Magistralis in Economics from University LUISS (Rome). He also has an LL.M. in International Business Law (London), Master in Competition Policy, in International Commerce and Contemporary 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 is also PhD candidate in Economics at University of Perugia. 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 was appointed 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. Since 2012, he runs also the Press Relations and the ESG departments, and since 2014 he is Chairman of TIM Institute and since 2017 he is CEO of the holding TIM Brasil Serviços e Participações. He has been acting as member of the Boards and Councils of national and international entities, including Conexis, 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).
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 Legalas an Officer at TIM since July 2010 and Secretary of the Company’s BoardOrder of Directors since 2012. He worked at Tetra PakRio Branco (2022) by the Ministry of Foreign Affairs.
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Fabiane Reschke. Ms. Reschke graduated with a Law degree from Pontifícia Universidade Católica do Rio Grande do Sul in 1993. She has over 20 years of experience in legal department management, 3 years of experience in the broadcasting industry, 13 years of experience in telecommunications and 8 years of experience in the insurance industry. From 1997 to 2000, she was a lawyer for Grupo RBS de Comunicações. Between 2000 and 2007, to 2010,she served as a Legal Director where heof Terra Networks Brasil S.A., an Internet access provider of the Telefónica Group. Between 2008 and 2011, she 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 anda Legal Director at Telefónica Brasil S.A. and Vivo S.A. Between 2011 and 2013, she was a Legal Director at SulAmérica S.A. From 2013 to 2015, she was Chief of Staff of the subsidiary companies. Mr. Horn worked asPresidency of Telefónica S.A. and from 2016 to 2022 she was Legal CounselDirector, Institutional and Governmental Relations at Companhia Atlantic de Petróleo (ARCO Petroleum Co.) from 1990 to 1994, as a LawyerSulAmérica S.A.
Maria Antonietta Russo. Ms. Russo is Italian, graduated in labor psychology and organization, management and human resources at Franco, Bhering, Barbosa & Novaes Law Firm for one year,Sapienza Università di Roma, and as a Tax Senior Consultant at Arthur Andersen for almost four years.
Leonardo de Carvalho Capdeville. Mr. Capdeville holds a master degree in labor psychology and organization, management and human resources from Instituto Nacional de Telecomunicações – INATEL,the Scuola Romana di Psicologia del Lavoro e dell´Organizzazione. Ms. Russo has served in Electronic Engineering, specializingseveral executive positions at Telecom Italia Group, starting her career in Telecommunications. He also holds an MBAthe area of people management at TIM Italia. She worked from Fundação Getúlio Vargas2004 to 2007 at TIM Brasil, first in Rio de Janeiro, Brazil. Mr. Capdeville also attended the International Programmanagement area and then as Director of Management Development and Education. Since 2007 she has held various positions at IEDE – InstituteTIM Italia including, most recently, head of development for Executive Development in Madrid, Spain andGroup companies from 2010 to the Disruptive Innovation Program by the Harvard Business School. Currently, he is Chief Technology Information Officer2012, head 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 departments at the Company. From 1998Training from 2012 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,head of development and new capabilities from 19912014 to 19952016, head of people development and theneducation from 19962016 to 1998. While at Promon, he held the position2018 and regional head of engineer responsible for implementing the mobile telephony in the State of Espírito Santo, Brazil, and performed other activities relatedhuman resources from 2018 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.2019.
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:
Name | Date of Birth | Date Appointed |
Flavia Maria Bittencourt | January 15, 1970 | March 31, |
Gesner José de Oliveira Filho (Coordinator) | May 17, 1956 | March 31, |
Herculano Aníbal Alves(*) | February 27, 1953 | March 31, |
(*) | Audit committee financial expert. |
The Statutory Audit Committee was created and its first members appointed at the TIM Participações S.A.’s 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.Resolution 23/2021. The Statutory Audit Committee’s
internal regulations were approved at TIM Participações S.A.’s the Board of Directors meeting held on December 23, 2013. After the merger of TIM Participações S.A. into the Company, the Statutory Audit Committee was created and approved by the Company at itsour shareholders’ meeting held on July 29, 2020.
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.
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The Statutory Audit Committee’s general duties and responsibilities under Brazilian corporate law, our By-laws and its internal rules, include: (i) issuing its opinion on the hiring and dismissal of the independent auditor responsible for the audit services on the financial statements, as well as any other services, whether or not they are audit services; (ii) analyzing the annual work plan, discussing the result of the activities performed, the revisions made and assessing the performance of the independent auditors; (iii) supervising the activities of the independent auditors with the purposes of assessing their independence, the quality and the adequacy of the services provided to the Company, including, to the extent allowed by the legislation, assisting in the solution of any divergences between the management and the independent auditors with respect to the presentation of the financial statements; (iv) supervising the activities performed by the internal audit, analyzing, for such purpose, the annual work plan, discussing the result of the activities performed, the revisions made and assessing the performance of the internal auditors; (v) supervising and analyzing the effectiveness, quality and integrity of the internal control mechanisms, in order to, among other things, monitor compliance with provisions related to: (i)(a) presentation of the financial statements, including the quarterly financial information and other interim statements; and (ii)(b) the information and measurements disclosed based on adjusted accounting data and on non-accounting data, which add elements that are not provided for in the structure of the usual reports of the financial statements; (vi) to have tools for receiving and treatment of information about non-compliance with legal and regulatory provisions applicable to the Company, in addition to internal regulations and codes, including provision for specific procedures to protect the provider and confidentiality of information; (vii) analyzing whistleblower reports, anonymous or otherwise, related to any accounting, internal controls or audit matters, received by the Company, as well as suggesting the measures that may be taken; (viii) examining, assessing and issuing its opinion, previously, on whether the agreements to be executed between the Company or its controlled companies, on 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, comply with the standards normally adopted in the market in transactions of the same nature between independent parts, based on the material submitted by the Company's management, and the Statutory Audit Committee may request additional clarifications or opinions of independent third parties, whenever it deems necessary; (ix) preparing summarized annual report, to be presented together with the financial statements, containing the description of: (a) its activities, the results and conclusions reached and the recommendations made; and (b) any situations in which there are significant divergences among the Company's management, the independent auditors and the Statutory Audit Committee with respect to the Company's financial statements; (x) assessing and monitoring the risk exposures of the Company, being authorized to request detailed information on policies and procedures related to: (a) the compensation of the management; (b) the use of the Company's assets; and (c) the expenses incurred on behalf of the Company; (xi) evaluating, monitoring and recommending to the Management the correction or improvement of the Company's internal policies, including the policy of transactions with related parties; and (xii) evaluating the quarterly information, interim statements and financial statements.
Fiscal Council
The current composition of the Fiscal Council consists of threetwo members elected by our controlling shareholder.shareholder and one member 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 2022:2024:
Name | Date of Birth | Date Appointed |
Walmir Urbano Kesseli (Chairman) | August 28, 1959 | March 30, |
March 30, | ||
March 30, |
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 a Control and Risks Committee and an Environmental, Social & Governance Committee.
Compensation Committee
The Compensation Committee was established by the TIM Participações S.A.’s Board of Directors on September 30, 2008 and, after the merger into the Company, by its shareholders’ meeting on July 29, 2020 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’sour statutory officers; and (4) monitor the performance of the decisions taken by management and the Company’sour policies relating to senior executive compensation; and (5) analyze other matters concerning the compensation of the Company’sour members, as delegated by the Board of Directors.
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The members of our Compensation Committee are appointed and dismissed by our Board of Directors. The Compensation Committee shall be composed of at least three (3) and at the most five (5) members, all elected by the Board of Directors.
The following are the current members of our Compensation Committee:
Name | Date of Birth | Date Appointed |
Nicandro Durante (Chairman) | September 13, 1956 | March 31, |
March 31, | ||
Michele Valensise | April 3, 1952 | March 31, |
Control and Risks Committee
The Control and Risks Committee was established by the TIM Participações S.A.’s Board of Directors on September 30, 2008 and, after the merger into the Company, by its shareholders’ meeting on July 29, 2020, tasked with the following responsibilities: (a)(i) 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)(ii) monitoring the Company’s compliance with our corporate governance policy and periodically updating the same; (c)(iii) without prejudice to the competence of the Board of Directors, recommending procedures for better supervision of the management of the Directors; (d)(iv) acknowledging the internal audit work plan reviewed by the Company’s Statutory Audit Committee in accordance with the Company’s By-laws; (e)(v) approving the compliance department’s work plan and monitoring compliance with the same; (f)(vi) 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)(vii) 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)(viii) 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)(ix) analyzing any other matters related to the internal control of the Company as are delegated by the Board of Directors.
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 at least three (3) and at the most five (5) members, all elected by the Board of Directors. The following are the current members of the Control and Risks committee:
| Date of Birth | Date Appointed |
Herculano Aníbal Alves (Chairman) | February 27, 1953 | March 31, |
Gesner José de Oliveira Filho | May 17, 1956 | March 31, |
March 8, 1967 | March 31, 2023 | |
Michele Valensise | April | March 31, 2023 |
Michela Mossini | September 29, 1968 | March 31, |
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Environmental, Social & Governance Committee
The Environmental, Social & Governance Committee was established by the Company’sour Board of Directors on December 10, 2020 to: (a)(i) evaluate the plan and general strategy of the Company’s ESG (ESG Plan)plan (“ESG Plan”) that will consolidate the ESG action plans, projects, proposals and initiatives, and how they may be organized and integrated into the internal processes and organizational structures for implementation of the ESG Plan by the Company, in line with the best practices of the market and the legislation in force; (b)(ii) review the goals and indicators panel of the Company’s ESG Plan, and recommend its approval by the Board of Directors; (c) To(iii) to follow up and routinely monitor the execution of the ESG Plan and its indicators; (d) In(iv) in the course of the monitoring described in item (c) above, inform the Board of Directors and the Statutory Audit Committee (“CAE”) and the Control and Risks Committee (“CCR”), as the case may be, of situations involving ESG topics and approaches with potential impact on the Company’s image, reputation and equity; (e)(v) request to the Company’s management, through its Chief Executive Officer, for any risk analysis or opportunities in the ESG area, whenever deemed necessary and appropriate for the effort of preventive performance or for the proper management of environmental, social and governance issues; (f)(vi) recommend to the Board of Directors the approval of corporative norms and procedures related to ESG issues, as well as the adoption of actions for their disclosure and for monitoring their compliance; (g)(vii) review the ESG reports, institutional communications and initiatives with public repercussion regarding the environmental, social and governance issues, and to recommend and suggest changes and possible improvements to the Board of Directors; (h)(viii) recommend adherence or continuity in national or international “Protocols”, “Principles”, “Agreements”, “Pacts”, “Initiatives” and “Treaties”, directly or indirectly related to ESG; (i)(ix) recommend to the Board of Directors, whenever deemed necessary, development or improvement programs to the management’s members, executives or employees, in order to provide training and disseminate knowledge in the ESG area; and (j)(xi) recommend the adoption of actions to strengthen the ESG culture in the Company.
The members of our Environmental, Social & Governance Committee are appointed and dismissed by our Board of Directors. The Environmental, Social & Governance Committee shall be composed of at least three (3) and at the most five (5) members, all elected by the Board of Directors.
The members of our Environmental, Social & Governance Committee are appointed and dismissed by our Board of Directors. The Environmental, Social & Governance Committee shall be composed of at least three (3) and at the most five (5) members, all elected by the Board of Directors.
The following are the current members of our Environmental, Social & Governance Committee:
Name | Date of Birth | Date Appointed |
Nicandro Durante (Chairman) | September 13, 1956 | March 31, |
March 31, | ||
March 31, | ||
Gesner José de Oliveira Filho | May 17, 1956 | March 31, |
Michela Mossini | September 29, 1968 | March 31, 2023 |
B. Compensation
At our annual shareholders’ meeting held on March 30, 2021,2023, our shareholders voted on the aggregate amount of approximately R$43.678.2 million as compensation to our statutory officers, approximately for a total annual compensation of R$3.0 million to our committees’ members, approximately R$616 thousand0.6 million to our fiscal council’s members and approximately R$4.9 million as compensation to our Board of Directors during 2021.2023. 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 2021.2023. The aggregate compensation to our statutory officers in the year ended December 31, 2020,2022, including fixed remuneration, benefits, bonuses, short-term incentive and long termlong-term incentive plans, was approximately R$33.469.6 million considering INSS (approximately R$31.765.2 million 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 2021 program has a duration of three years. 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 Companyus until the completion of the vesting period (or so-called restricted shares).
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For the year ended on December 31, 2020,2022, each member of our Board of Directors received annual compensation an average of R$953 thousand1.0 million considering INSS (R$794 thousand0.9 million without INSS) and each member of our Fiscal Council received annual compensation of R$201 thousand0.2 million considering INSS (R$168 thousand0.2 million 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, 2020,2022, we had 9,4219,406 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, 2020, 20192022, 2021 and 2018.2020.
As of December 31, | As of December 31, | |||||
2020 | 2019 | 2018 | 2022 | 2021 | 2020 | |
Network & Information Technology | 2,358 | 2,374 | 2,360 | 2,189 | 2,191 | 2,358 |
Sales and marketing | 3,665 | 3,363 | 3,309 | 3,801 | 3,550 | 3,665 |
Customer care | 1,887 | 2,286 | 2,577 | 2,060 | 2,075 | 1,887 |
Support and other | 1,511 | 1,677 | 1,415 | 1,356 | 1,521 | 1,511 |
Total number of employees | 9,421 | 9,700 | 9,661 | 9,406 | 9,337 | 9,421 |
For the year ended on December 31, 2022, we undertook some important changes. Since the worst periods of COVID-19 restrictions had passed, our stores could return to operating with maximum capacity, increasing the number of employees working in the sales areas. On the other hand, some support activities were revised and passed through Business Process Outsourcing (BPO). Most of our employees impacted by this process were moved internally to other areas, that are now responsible for those activities.
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 annually negotiate annually a new collective bargaining agreement and profit sharingprofit-sharing program with boththe above mentioned federations and unions. Management believes that our relationships with our workforce are satisfactory. We didhave not experienceexperienced a work stoppage that had a material effect onin our operations.
Employee Benefit Pension Plans
The CompanyWe and itsour former 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.compensation. 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, the Companywe assumed responsibility for the pension plans of all of itsour former subsidiaries.
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The oldest pension plans, closed to new members, are managed by Icatu Fundo Multipatrocinado. Funcesp, currently Vivest, 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 Company’s 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 optionsshare-based incentives 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 statement of income, statement, with a corresponding adjustment to the capital reserve.
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, 2020,2022, our board members, fiscal council members and statutory officers, owned, in the aggregate, 235,341925,495 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(share-based incentives 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.”
F. Disclosure of a registrant’s action to recover erroneously awarded compensation.
Not applicable.
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, 2020.2022. We are not aware of any other shareholder that beneficially owns more than 5% of our common shares.
Name of owner | Common Shares Owned | Percentage of Outstanding Common Shares | Common Shares Owned | Percentage of Outstanding Common Shares |
TIM Brasil Serviços e Participações S.A. | 1,611,969,946 | 66.59% | 1,611,969,946 | 66.59% |
All our officers and directors as a group* | 373,467 | 0.01% | 925,495 | 0.01% |
Total | 1,612,343,413 | 66.60% | 1,612,895,441 | 66.60% |
* | Represents less than 1%. |
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Since TIM Brasil owns 66.59% 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, 2020,2022, there were 188,136,07579,748,710 common shares represented by ADSs. As of such date, the number of common shares represented by ADSs represented 7.8%3.3% of our total capital.
TIM Brasil is a publicly held category B company, 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(the “Telecom Italia Group,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.
B. Related Party Transactions
As of December 31, 2020,2022, 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$10,718 thousand45 million and R$127,386 thousand,251 million, respectively, as of December 31, 20202022 with companies of the Telecom Italia Group. SeeGroup (see Note 3437 to our consolidated financial statements.statements).
Guarantees of Obligations of our Subsidiaries
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 S.A. and its Subsidiaries
At the annual and extraordinary shareholders’ meeting held on March 30, 2021, TIM S.A.’s2023, 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, 2022.2024. The purpose of this agreement was to enable TIM and its subsidiaries,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:
· | Benefiting from Telecom Italia’s experience and industrial capacity as one of the major players in the European market; |
· | 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 |
· | 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 €8.1€7.9 million. The price cap represents the maximum consideration to be paid by TIM operating companiesus for all the services and support rendered by Telecom Italia during 20212023 and 20222024 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.”
Legal Proceedings
The Company and its subsidiariesWe 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 (non-consumer), 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 2325 to our consolidated financial statements.
Consumer Lawsuits
As of December 31, 2020, our subsidiaries2022, we are party to consumer lawsuits at the judicial and administrative levels where an amounting to R$139,429179,132 thousand (R$135,290150,881 thousand as of December 31, 2019)2021) was provisioned.accounted for. These lawsuits generally relate to questions regarding alleged improper billing, contract cancellation, quality of services and undue restriction.
PROCON and Other Consumer Actions
TIM isWe are involved in judicial and administrative proceedings brought by the Brazilian Consumer Protection Agency (which is composed, among other entities, by Procons – Fundação de Proteção e Defesa do Consumidor), or PROCON, and various state public prosecutor’s offices wherein the amount of R$51,713168,987 thousand as of December 31, 20202022 (R$31,221116,985 thousand as of December 31, 2019)2021) was provisioned.accounted for. 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)and (v) misleading advertising; and (vii) suspension of loyalty benefits in cases of theft of cell phones.advertising.
Former Trade Partners
TIM isWe are a defendant in lawsuits filed by certain former commercial partners for alleged breach of contract. The amountsamount involved forin such lawsuits where an amount ofis R$18,63427,740 thousand as of December 31, 20202022 (R$12,81220,708 thousand as of December 31, 2019).
Most materially, TIM is the defendant in lawsuit filed by Carlo Spyer Pompeu, a former commercial partner, who claimed for supposed due and unpaid commissions related to the TBP (TIM Business Partner) contract held between the parties. The sale representative also claimed financial compensations according to Law No. 4,886/1965. TIM was convicted to pay such contractual and legal expenses. The Claimant started the enforcement phase, in which the parties are discussing an amount of R$4,904 thousand as of December 31, 2020.Also, TIM is the defendant in a lawsuit filed by Botafogo Comércio e Importação Ltda. in which the Company was convicted 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$4,901 thousand as of December 31, 2020. Currently, TIM is waiting for a decision to be handed down in respect of Botafogo Comércio e Importação Ltda.’s appeal before the Superior Court (STJ)2021).
Social, Environmental, and Infrastructure
As of December 31, 2020, our subsidiaries2022, we are party to lawsuits with various actors arising from issues of environmental licensing and installation/operation licensing, actions directed at network infrastructure and environmental issues. The company has provisioned
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We have accounted for in connection with such lawsuits an amount of R$6102,471 thousand as of December 31, 20202022 (R$498356 thousand as of December 31, 2019)2021).
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 that were accounted for involved in such civil claims where R$33,68214,642 thousand as of December 31, 20202022 (R$27,03920.089 thousand as of December 31, 2019)2021).
Most importantly, TIM is the defendant in lawsuit filed by Orolix Desemvolvimento de Software Ltda, a former Intelig service provider, who claimed for supposed due and unpaid commissions related to contract held between the parties. The total amount claimed by the counterparty is an amount of R$9,740 thousand, as of December 31, 2020. An expert report was issued by the Court’s nominee expert, pointing out an amount of R$835 thousand as of July 3, 2020. Currently, TIM is waiting a first instance decision.
Additionally, TIM S.A. (formerly Intelig) was 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 historical amount of R$3,373 thousand as of December 31, 2020, based on the reasoning that Editora JB and Gazeta Mercantil are part of the same economic group as the Company.
The Company filed an interlocutory appeal, which was not granted. After that, the Company filed a request for amendment, which was also rejected. The Company 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 claimsclaim 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.companies. There were 1,8731,628 labor claims filed against the Company and its subsidiariesus as of December 31, 2020, (2,4082022, (1,314 as of December 31, 2019)2021), 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$213,026214,450 thousand as of December 31, 20202022 (R$252,968192,132 thousand as of December 31, 2019)2021).
There are a series of labor claims, brought by former Gazetaemployees of Docas economic group (Gazeta Mercantil, employees whoJB do Brasil, etc). These plaintiffs have filed claims requesting the inclusion of Holdco (the former controlling shareholder of Intelig) or TIM Participações as defendants, claiming damages from Holdco andrequesting the payment of the court decision by TIM, Participações Plaintiffs who have filed the claims were employeesdue to alleged formation of Gazeta Mercantil, without any employment ties to Holdco or TIM Participações. However, prior to the merger with TIM Participações, Holdco belonged to the Docasan economic group, of which Gazeta Mercantil is part.group.
Social Security Claims
TIM S.A. received a Tax Notification referringWe are currently subject to alleged irregularity in the payment of22 social security contributions in connectionclaims, with the payment of profit sharing, in thea probable loss amount of R$9,487 as of December 31, 2020 (R$22,58724,197 thousand as of December 31, 2019 – possible risk). There is also a Tax Assessment Notice in the amount of2022 (compared to R$9,436 of December 31, 2020 (R$6,39923,786 thousand as of December 31, 2019) for2021). The majority of these claims relate to the legal uncertainty related to the events that should compound the tax calculation basis of our social security contributionson payroll.
Antitrust Claims
We are currently being investigated by CADE, regarding the following facts: (i) third-parties claims that the alleged formation of a consortium by the applicants (us, Claro and Vivo) for jointly acquiring Oi's mobile assets was an infraction to Brazilian antitrust laws, by the consummation of the referred transaction before the antitrust authority reached a final decision; and (ii) the occurrence of collusive and exclusionary practices among competitors (with Vivo and Claro) regarding Oi’s mobile assets acquisition – this second investigation’s files are not public yet and we were allegedly duenot officially notified, but CADE’s final decision in connection withOi’s assets transaction expressly determined the following: (1) hiring bonuses (2) non-adjusted bonuses (3) payments to self-employed persons, and (4) sales incentives. opening of such proceeding.
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$4,319,4643,327,377 thousand as of December 31, 20202022 (R$4,279,5703,077,862 thousand as of December 31, 2019)2021).
The amounts relating to federal taxes not including regulatory taxes (FUST/FUNTTEL/FISTEL and other) where the risk of loss is considered probable is R$108,358179,863 thousand as of December 31, 20202022 (R$155,495127,183 thousand as of December 31, 2019)2021).
The most relevant claims assessed are:
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· | Tax carryforward losses and Social Contribution on Profits (Contribuição Social sobre o Lucro Líquido) (“CSLL”), |
· | Alleged improper credits that resulted in tax carryforward losses and CSLL negative basis compensation disallowance. The amount in controversy, classified as a possible contingency, is R$ |
· | 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$ |
· | 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 |
· | 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$ |
State Taxes
The total state tax claims assessed against the Companyus where the risk of loss is considered possible is equal to R$8,586,7189,640,939 thousand as of December 31, 20202022 (R$8,221,8088,782,114 thousand as of December 31, 2019)2021). The amounts relating to state tax disputes where the risk of loss is considered probable is R$135,891130,816 thousand as of December 31, 20202022 (R$93,790145,436 thousand as of December 31, 2019)2021).
The most relevant claims assessed are:
· | Alleged incorrect deduction of unconditional discounts offered to customers in the ICMS basis of calculation, as well as penalties for alleged noncompliance with an accessory obligation. The amount in controversy, classified as a possible contingency, is R$ |
· | 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$ |
· | ICMS credits reversal and credits arising from the acquisition of fixed assets. The amount in controversy, classified as a possible contingency, is R$ |
· | 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$ |
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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$ |
· | 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$ |
· | 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$ |
· | ICMS credits entries regarding the tax treatment of handsets loan operations. The amount in controversy, classified as a possible contingency, is R$ |
· | 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$ |
Municipal Taxes
The total municipal tax claims assessed against the Company with a possible risk of loss is equal to R$740,8131,587,910 thousand as of December 31, 20202022 (R$703,1321,234,618 thousand as of December 31, 2019)2021). The amounts relating to municipal taxes where the risk of loss is considered probable is R$5,633 8,550 thousand as of December 31, 20202022 (R$8,2277,626 thousand as of December 31, 2019)2021).
The most relevant claims assessed are:
· | Charge of ISS tax and penalties due to the supposed lack of collection over the Company’s revenue accounts. The amount in controversy, classified as a possible contingency, is R$ |
· | Alleged lack of ISS collection regarding import services |
· | 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$ |
FUST and FUNTTEL
The total amount assessed against the Company with a possible risk of loss is equal to R$3,014,9773,666,656 thousand as of December 31, 20202022 (R$2,991,5673,266,381 thousand as of December 31, 2019)2021).
The amounts relating to FUST and FUNTTEL tax claims where the risk of loss is considered probable is R$73,78980,343 thousand as of December 31, 20202022 (R$72,68075,562 thousand as of December 31, 2019)2021).
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.
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Material Proceedings with Adverse Director, Management or Affiliate
None.
Dividend Policy
Under our By-laws and our Results Allocation Policy, 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. The Company 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, according to Law No. 9,249/1995. 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’sOur 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.
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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.IFRS, as issued by IASB.
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:
· | 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.
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 “TIMS3,” and our ADSs are listed on the NYSE, under the symbol “TIMB” as a result of the consummation of the Merger and the approval of the listing of our shares on the Novo Mercado segment of the B3 and our succession as successor issuer to TIM Participações under Rule 12g-3(a) promulgated under the Exchange Act. Prior to October 2020, the common shares of TIM Participações S.A. were listed under the symbol “TIMP3” and its ADSs listed on the NYSE under the symbol “TSU.” The table below sets forth, for the indicated periods, the high and low closing prices of our ADSs on the NYSE, in U.S. dollars, and our common shares on the B3, in reais. On December 31, 2020,2022, the last reported sales price of our common shares on the B3 was R$14.6512.40 and on December 31, 2020,2022, the last reported sales price of our ADSs on the NYSE was U.S.$14.03.11.65. As of December 31, 2020,2022, the U.S. dollar-real exchange rate was R$5.195.29 per U.S.$1.00.
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NYSE | B3 | NYSE | B3 | |||||
High | Low | High | Low | High | Low | High | Low | |
(in U.S.$ per ADS) | (in reais per common share) | (in U.S.$ per ADS) | (in reais per common share) | |||||
Year ended | ||||||||
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 | 22.93 | 14.06 | 15.95 | 10.63 |
December 31, 2019 | 19.16 | 12.48 | 15.57 | 10.20 | 19.16 | 12.48 | 15.57 | 10.20 |
December 31, 2020 | 14.04 | 13.86 | 15.05 | 14.61 | 14.04 | 13.86 | 15.05 | 14.61 |
Year ended December 31, 2019 | ||||||||
December 31, 2021 | 11.69 | 11.52 | 13.07 | 12.73 | ||||
December 31, 2022 | 14.54 | 10.11 | 13.51 | 11.07 | ||||
Year ended December 31, 2021 | ||||||||
First quarter | 17.00 | 14.25 | 12.58 | 11.05 | 10.91 | 10.64 | 12.44 | 12.10 |
Second quarter | 15.73 | 12.48 | 12.08 | 10.20 | 11.32 | 11.11 | 11.38 | 11.18 |
Third quarter | 15.88 | 13.76 | 12.25 | 11.07 | 10.61 | 10.36 | 11.58 | 11.37 |
Fourth quarter | 19.16 | 13.44 | 15.47 | 11.16 | 11.69 | 11.52 | 13.07 | 12.73 |
Year ended December 31, 2020 | ||||||||
Year ended December 31, 2022 | ||||||||
First quarter | 12.26 | 11.46 | 12.74 | 11.87 | 13.74 | 10.11 | 13.14 | 11.45 |
Second quarter | 12.59 | 12.15 | 13.74 | 13.26 | 14.54 | 11.22 | 13.51 | 11.63 |
Third quarter | 11.36 | 11.12 | 12.82 | 12.57 | 12.09 | 10.50 | 12.76 | 11.07 |
Fourth quarter | 14.04 | 13.86 | 15.05 | 14.61 | 12.98 | 10.80 | 13.15 | 11.45 |
Month ended | ||||||||
October 31, 2020 | 10.29 | 9.98 | 11.94 | 11.51 | ||||
November 30, 2020 | 12.84 | 12.33 | 13.95 | 13.27 | ||||
December 31, 2020 | 14.04 | 13.86 | 15.05 | 14.61 | ||||
January 31, 2021 | 18.92 | 18.63 | 16.24 | 15.84 | ||||
February 29, 2021 | 17.45 | 16.70 | 15.68 | 15.06 | ||||
March 31, 2021 | 12.26 | 11.46 | 12.74 | 11.87 | ||||
April 2021 (through April 29, 2021) | 11.47 | 10.58 | 12.79 | 11.81 | ||||
October 31, 2022 | 12.31 | 10.80 | 12.67 | 11.45 | ||||
November 30, 2022 | 12.98 | 11.46 | 13.15 | 12.30 | ||||
December 31, 2022 | 12.18 | 11.13 | 12.63 | 11.78 | ||||
January 31, 2023 | 11.39 | 10.50 | 11.67 | 11.11 | ||||
February 28, 2023 | 11.84 | 10.05 | 12.12 | 10.53 | ||||
March 31, 2023 | 12.51 | 11.29 | 12.77 | 11.69 | ||||
April 2023 (through April 27, 2023) | 14.06 | 11.89 | 14.00 | 12.02 |
At an extraordinary shareholders meeting held on August 31, 2020 our shareholder approved, among other things: (1) the Merger, in accordance with the Merger Agreement, executed on July 29, 2020, upon which the shareholders of TIM Participações became entitled to receive 2,420,447,019 new common shares issued by the Company,us, applying, as substitution ratio the attribution of one common share issued by the Companyus for one common share issued by TIM Participações; (2) the Company’sour adherence to the Novo Mercado listing at B3, and (3) amendments to our By-laws. See “Item 4. Information on the Company—A. History and Development of the Company—2020 Important Events—Recent Developments—Merger of TIM Participações S.A.”
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 September 28, 2020, 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.
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At an extraordinary shareholders meeting held on June 22, 2011, TIM Participações S.A.’s shareholders approved, among other things: (1) the conversion of all of TIM Participações S.A.’s preferred shares into common shares, at a ratio of 0.8406 common shares for each preferred share; (2) TIM Participações S.A.’s adherence to the Novo Mercado rules and the transfer of trading of the shares issued by it to the Novo Mercado,; and (3) amendments to TIM Participações S.A.’s By-laws.
In order to join the Novo Mercado, TIM Participações entered into a Novo Mercado Participation Agreement with the B3. Through this agreement, which became effective on July 27, 2011, TIM Participações was required to comply with heightened requirements relating to corporate governance and the disclosure of information to the market. Additionally, as of such date, TIM Participações S.A.’s shares started trading on the Novo Mercado segment
of the B3. Pursuant to the Novo Mercado Regulations, TIM Participações was not permitted to issue preferred shares, participation bonuses or any kind of shares with restricted voting rights.
Prior to August 2, 2011 TIM 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.
Starting on October 13, 2020, TIM common shares began trading on the B3 under the symbol “TIMS3”. Starting on October 16, 2020 our ADSs began trading on the regular basis on the NYSE, each representing five common shares, under the symbol “TIMB”.
B. Plan of Distribution
Not applicable.
C. Markets
Our common shares are listed on the Novo Mercado segment of the B3 under the symbol “TIMS3” and our ADSs are listed on the NYSE, under the symbol “TIMB.” 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., 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.
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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.
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 |
· | 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, as amended after a restricted hearings with the listed companies held in June 2017.B3. These are to be fully implemented until our annual shareholders’ meeting to be held in 2022:by us:
· | only common shares, with voting rights; |
· | 100% tag along, with the same conditions for all shareholders in transfer of control; |
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· | establishment and maintenance of Internal Audit Department, Compliance Department and Audit Committee (statutory or non-statutory); |
· | public offer required in case of delisting from Novo |
· | at least two or 20% of board members must be independent (whichever is greater); |
· | 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; |
· | structuring and release of the evaluation process of the board of directors, its committees and the executive board; |
· | elaboration and release of the following policies (i) compensation; (ii) appointment of members of the board of directors, its advisory committees and statutory board; (iii) risk management; (iv) transaction with related parties; and (v) securities trading, with minimum content (except for the remuneration policy); and |
· | simultaneous release, in English and Portuguese, of material facts, information on earnings and press releases of results. |
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&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.
On August 31, 2020, the Extraordinary Shareholders’ Meeting of TIM Participações, Company’sour sole and controlling shareholder before the consummation of the Merger, approved the Company’sour migration to the Novo Mercado listing segment of the B3, which took place on September 28, 2020. As a result, we continue to be listed on the Novo Mercado, the highest level of corporate governance.
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.
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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,Resolution 44/21, 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.
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.
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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) 33.300.324.631.
Corporate Purpose
Article 23 of our By-laws provides that our corporate purpose is to:
(1) implement, expand, operate and provide any kind of electronic communications services and their contents, under the applicable legislation; (2) build, manage, implement, execute, operate and provide maintenance services, or commercialize infrastructure for private or third-parties use; (3) commercialize goods, provide services, develop activities and practice any acts and/or legal transactions, direct or indirectly, or which are complementary, related or bounded to the services or activities stated in the corporate purpose; and (4) hold interest in the capital of companies that explore any typeother business or non-business companies.
Without prejudice to the development of telecommunicationsnew services underor activities, we may, among other activities:
(1) commercialize, rent, lend, provide installation and/or maintenance services to the terms and conditions provided for in the relevant permits, authorizations or concessions, companies that develop activities that are necessary or useful goods related to the services provision ofstated in the corporate purpose, such services, or companies that provide Internet connection services, Value-Added Servicesas, handsets, electronic devices, computers and Internet application services;others, its accessories and replacement parts; (2) promote, through its controlled or affiliated companies, the expansionimport and implementation of any type of telecommunications services, under the termsexport necessary goods 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 trainingexecution of the staff requiredactivities stated in the corporate purpose; (3) provide administrative, consulting, advisory and planning services; (4) provide services and/or develop activities related to the internet of things, artificial intelligence and others; (5) provide services regarding information technology and internet, such as, licensing services or assignment of right of use computer programs, technical support services, including installation, configuration, development and maintenance of programs, of computing systems and database, and processing of data services; (6) provide services of information security, of monitoring and of georeferencing; (7) provide marketing and advertising campaign support and marketing services of its own or third parties, including, the activities of preparing and sending offers, advertising materials and publicity to clients, through any physical or virtual medium; (8) provide commercial representation and insurance representative services; (9) provide services to financial institutions, including correspondent banking, under the applicable legislation, such as, but not restricted to: (i) receipt and forwarding of proposals for the opening of deposit and savings accounts held by the telecommunications industry in general; (7) perform or promotecontracting institution; (ii) receipt and forwarding of proposals for credit and leasing operations granted to the importationcontracting institution, as well as other monitoring services; and (iii) receipt and forwarding of goods and servicesproposals for the controlledsupply of credit cards under the responsibility of contracting institution; (10) buy, sell or affiliated companies; (8)disclose, through any kind of electronic communication, digital goods or assets, such as, e-books, audiobooks, journals and others; (11) promote charging and data management services; (12) engage in any other activities related or akin to its purpose; and (9) hold interest in the corporate capital of other companies.previous items.
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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 |
· | the Board of Directors has the power to |
· | 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 |
· | the power to |
· | the power to |
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.
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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 interest rate 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.
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 |
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· | 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.
Rights to share in any surplus in the event of liquidation
We may be liquidated in the cases provided by law, or upon the decision of shareholders at a shareholders’ meeting, which shall determine the method of liquidation, elect the liquidator and install the fiscal council for the liquidation period, electing its members and determining their respective remuneration.
Meeting of Shareholders
According to Brazilian law and CVM’s regulations, 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 30 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.
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:
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· | 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 Companyour 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; |
· | to decide on the |
· | 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 |
· | to resolve in compliance with all provisions of any law, the By-laws or the Novo Mercadorules 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 |
· | to choose a company to prepare an opinion concerning the appraisal of |
· | to previously approve the execution of loan agreements, management agreements and technical support services agreements, between |
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.
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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:
· | reduce the mandatory distribution of dividends; |
· | change our corporate purpose; |
· | participate in a group of companies; |
· |
split up, subject to the conditions set forth by Brazilian corporate law; and |
· |
merge or consolidate ourselves with another company. |
The redemption right expires 30 days after publication of the minutes of the relevant shareholders’ meeting. The shareholders would be entitledmanagement bodies may call a general meeting 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.
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.
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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:
· | appoint at least one representative in Brazil with powers to perform actions relating to the foreign investment; |
· | complete the appropriate foreign investment registration form; |
· | obtain registration as a foreign investor with the CVM; and |
· | register the foreign investment with the Central Bank. |
The securities and other financial assets held by the foreign investor pursuant to Resolution CMN 4,373 must be:
· | registered or maintained in deposit accounts or under the custody of an entity duly licensed by the Central Bank or by the CVM; or |
· | registered in registration, clearing and custody systems authorized by the Central Bank or by the CVM. |
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.
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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 two countries have tax treatment reciprocity, which means that a tax paid in one country might be offset against the income tax due in the other country, or vice-versa, if conditions are met. It is important to mention that 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.
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 be applied 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 No. 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.
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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:
· | appointed a representative in Brazil with power to take action relating to the investment in common shares; |
· | registered as a foreign investor with the CVM; and |
· | registered its investment in common shares with the Central Bank. |
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.
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 must be supported by proven documents.
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:
· | the average price per common share on the B3 on the day of the deposit; or |
· | if no common shares were sold on that day, the average price per common share on the B3 during the fifteen preceding trading sessions. |
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.
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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 60 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 and Hong Kong.
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.
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 |
· | 50% of retained earnings for the year prior to the year in respect of which the payment is made. |
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 Companywe and itsour subsidiaries have been paying interest on equity since 2017 and paid in 20202021 as well. Please refer to “Item 4. Information of the Company—2020 Important Events—Interest5. — Operating and Financial Review and Prospects” —Dividend Distribution —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 (and confirmed by RFB Normative Instruction No. 1,969/2020). In 2022, Decree No. 9.297/2018 was revoked by Decree No. 11,153/2022, although there were no changes in the 1.10% rate mentioned. In addition, as a step aimed to aid Brazil’s bid to join the Organization for Economic Co-operation and Development (OECD), the Brazilian Federal Government, through Decrees No. 10,997/2022 and 11,153/2022, compromised to gradually reduce the IOF on foreign exchange transactions. Tax on Foreign Exchange and Financial TransactionsTransactions.
Tax on foreign exchange transactions or the(the “IOF/Exchange Tax”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.
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.
As mentioned previously, the Federal Government has adopted some measures to support Brazil’s request to become a member of the OECD. One of those measures was to compromise to gradually reduce the IOF/exchange tax to zero by 2029, through Decrees No. 10,997/2022 and 11,153/2022.
Tax on transactions involving bonds and securities or the(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.
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U.S. Federal Income Tax Considerations
The following are the material 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. This 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:
· | certain financial institutions; |
· | insurance companies; |
· | dealers or traders in securities or foreign currencies who use a mark-to-market method of tax accounting; |
· | persons holding common shares or ADSs as part of a “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; |
· | persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar; |
· | partnerships or other entities classified as partnerships for U.S. federal income tax purposes; |
· | persons liable for the alternative minimum tax or the provisions of the Code (as defined below) known as the Medicare Contribution Tax; |
· | tax-exempt entities, including “individual retirement accounts” |
· | persons who acquired our common shares or ADSs pursuant to the exercise of an employee stock option or otherwise as compensation; |
· | persons holding our common shares or ADSs in connection with a trade or business conducted outside the United States; or |
· | persons holding common shares or ADSs that own or are deemed to own 10% or more of our stock (by vote or value). |
If an entity or arrangement 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.
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:
· | a citizen or individual resident of the United |
· | 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 |
· | 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 foreignnon-U.S. tax consequences of owning and disposing of common shares or ADSs in their particular circumstances.
This discussion assumes that the Company iswe are 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, 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 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.
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, 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.liability, if such taxes were paid or accrued in a taxable year beginning before December 28, 2021.
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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. Recently issued Treasury regulations, which apply to foreign taxes paid or accrued in taxable years beginning on or after December 28, 2021 (the “Final Treasury Regulations”), impose additional requirements for foreign taxes to be eligible for credit. We have not determined whether these requirements have been met with respect to any withholding tax imposed on dividends on common shares or ADSs and, therefore, U.S. Holders should consult their tax advisers as to the availability of foreign tax credits for any amounts withheld with respect to dividends on common shares or ADSs to which the Final Treasury Regulations apply. Even if the Brazilian withholding taxes on dividends are not eligible for a foreign tax credit, a U.S. Holder may be entitled to deduct such taxes, subject to applicable limitations under the Code. 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. In addition, in taxable years to which they apply, the Final Treasury Regulations generally will preclude U.S. Holders should consult theirfrom claiming a foreign tax adviserscredit with respect to any tax imposed on gains from the disposition of shares by a jurisdiction, such as to whether these Brazilian taxesBrazil, that does not have an applicable income tax treaty with the United States, although a U.S. Holder may be creditable againstentitled to reduce the U.S. Holder’s U.S. federal income tax liability on foreign-source income from other sources. Insteadamount realized upon the disposition by the amount of any such taxes. Separately, instead of claiming a credit, a U.S. Holder may elect to deduct suchcreditable Brazilian taxes in computing its taxable income, subject to generally applicable limitations under U.S. law. An election to deduct creditable foreign taxes instead of claiming foreign tax credits must apply to all creditable foreign 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.circumstances (including any applicable limitations).
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 20202022 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.
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.
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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.
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 – 12th12th floor, 22775-057, Rio de Janeiro, RJ, Brasil.
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I. Subsidiary Information
Not applicable.
J. Annual report to security holders.
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.(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, 2020,2022, the amount of our outstanding debt which accrued interest at the CDI, TJLP, SELIC and SELICIPCA floating interest rates totaled R$2,3454,970 million, compared to R$1,9693,845 million for the year ended December 31, 2019.2021. On the same date, we had cash and cash equivalents and marketable securities in the amount of R$4,6464,739 million in instruments accruing interest at the CDI rate, as compared to R$2,9399,797 million on December 31, 2019.2021.
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, 20202022 would have resulted in a variation of R$2349.7 million in our interest expenses from financial contracts and a variation of R$4647.4 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).
For further information on our interest rate risks and related sensitivity analysis, see note 36Note 39 to our audited consolidated financial statements.
Exchange Rate Risk
As of December 31, 2020,2022, 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.
As of December 31, 20192022 and 2020,2021, we did not have call options.
For further information on our exchange rate risks and related sensitivity analysis, see note 36Note 39 to our audited consolidated financial statements.
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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:
Depositary Actions: | Description of Fees Incurred by ADR Holders per Payment: |
Depositing or substituting the underlying shares | U.S.$5.00 or less per 100 ADSs (or portion thereof) |
Receiving or distributing dividends | U.S.$0.05 or less per ADS (or portion thereof) |
Selling or exercising rights | U.S.$5.00 or less per 100 ADSs for all distributions of securities or the net cash proceeds from the sale thereof |
Withdrawal of an underlying security | U.S.$5.00 or less per 100 ADSs (or portion thereof) |
Transferring, splitting, grouping receipts | 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 | 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. |
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 partythird-party expenses.
During the year ended December 31, 2020,2022, we received from our depositary as gross income U.S.$3,463,744.001,691,697 as reimbursement of expenses related to annual stock exchange listing fees, standard maintenance costs of ADRs, underwriting and legal fees and investor relations activities, from which $1,039,123.00U.S.$507,509 was withheld for U.S. federal income taxes.
See also “Item 10. Additional Information—E. Taxation.”
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Item 13. | Defaults, Dividend Arrearages and Delinquencies |
None.
Item 14. | Material Modifications to the Rights of Security Holders and Use of Proceeds |
None.
Item 15. | Controls and Procedures |
(a) Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2020.2022. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on that evaluation, as of December 31, 2020, our
Our Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are effective to provide reasonable assurance that all material information required to be filed in this annual report has been made known to them in a timely fashion. Ouras of December 31, 2022 our disclosure controls and procedures arewere effective to provide reasonable assurance that information required to be disclosed by us in the reports that we filefiled or submitsubmitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’sapplicable rules and forms, and are effective to provide reasonable assurance that information to be disclosed in the reports that we file or submit under the Exchange Actit is accumulated and communicated to our management, including our Chief Executive Officerchief executive officer and Chief Financial Officer,chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Management’s Annual Report on Internal Control over Financial Reporting
ManagementOur management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Our internal control system was designed to provide reasonable assurance as toregarding the integritypreparation and reliabilityfair presentation of the published consolidated financial statements.statements in accordance with IFRS, as issued by IASB. All internal control systems, no matter how well designed, have inherent limitations and can provide only reasonable assurance that the objectives of the control system are met.
ManagementOur management evaluated the internal control over financial reporting under the supervision of our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, as of December 31, 2020.2022. Management evaluated the effectiveness of our internal control over financial reporting based on the criteria set forth in the Committee of Sponsoring Organizations of the Treadway Commission framework of 2013. Our management concluded that as of December 31, 2020,2022, our internal control over financial reporting was effective and had no material weaknesses, based on those criteria.
In accordance with the directive issued by the Securities and Exchange Commission that the evaluation of a recently acquired business can be omitted from the management report on internal control in the period of disclosure in the year in which the acquisition occurred, management excluded the assessment of the effectiveness of internal control disclosure period for Cozani RJ Infraestrutura e Redes de Telecomunicações S.A., whose total assets, net assets and revenues constituted approximately 10%, 4% and 3%, respectively, as of, and for, the year ended December 31, 2022. We are committed to continuing to improve our internal control processes and will continue to diligently review our financial reporting controls and procedures in order to ensure our compliance with the requirements of the Sarbanes-Oxley Act of 2002 and the related rules promulgated by the SEC. Our independent registered public accounting firm during the year ended December 31, 2020,2022, Ernst & Young Auditores Independentes S.S.S./S Ltda., has issued an auditattestation report on the effectiveness of our internal controls over financial reporting as of December 31, 2020.2022.
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(c) AuditAttestation Report of the Registered Public Accounting Firm
Ernst & Young Auditores Independentes S.S.S/S Ltda., the independent registered public accounting firm that has audited our consolidated financial statements, has issued an auditattestation report on the effectiveness of our internal controls over financial reporting as of December 31, 2020.2022. Their attestation report on internal controls over financial reporting is included herein.
(d) Changes in Internal Control over Financial Reporting
The CompanyWe constantly aimsaim to improve the quality of itsour internal controls over financial reporting. This may result in the modification of certain internal processes and operations, without necessarily affecting related controls. There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this annual report that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting. The controls described above were not applied to our former subsidiary, SPE Cozani, which was merged into the Company on April 1, 2023.
Item 16. | [Reserved] |
Item 16A. | Audit Committee Financial Expert |
Our Statutory Audit Committee, which functions as an audit committee, shall be comprised of at least three and at most five members and an equal number of alternates, who may or may not be shareholders, elected by the Board of Directors. In 2020,2023, we hadhave three members. Our Statutory Audit Committee has determined that one of its members, Mr. Herculano Aníbal Alves, an independent member of our Statutory Audit Committee under Brazilian rules, is an “audit committee financial expert,” as such term is defined by the SEC.
Item 16B. | Code of Ethics |
Code of Ethics
We believe that ethics in conducting business is always important for a company’s success. Accordingly, we adopted a Code of Ethics that applies to our Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer and persons performing similar functions, as well as to our other Directors, Statutory Officers, controlling shareholders, members of our boards and committees, all employees and suppliers. Our Code of Ethics is filed as an exhibit to this annual report and is available on our website at https://ri.tim.com.br/Default.aspx.ri.tim.com.br. It can also be requested, free of charge, by email or telephone at the address set forth in the second paragraph of “Item 4. Information on the Company—A. History and Development of the Company—Basic Information.” The Code of Ethics was updated at the Board of Directors’ meeting held on July 29, 2020.March 24, 2021.
Our Code of Ethics addresses most of the principles set forth by the SEC in Section 406 of Sarbanes-Oxley, and, pursuant to section 156 of Brazilian Corporate Law No. 6,404, establishes that an officer or a board member is prohibited from taking part in any corporate transaction in which he has an interest that conflicts with the interests of the Company, and is required to disclose to the board the conflict of interest. Any contract can only be entered into under reasonable and fair conditions. Contracts with a related party must be entered into on an arm’s-length basis.
The Code of Ethics also requires all adherents to immediately report any situation that is illegal and/or that may have a negative impact on the CompanyCompany’s interests including any violation or incentive for violations of (a) laws or regulations, (b) the provisions of the Code of Ethics or (c) other internal regulation or occasional irregularities or negligence in the maintenance, information and management of accounting reports. The Code of Ethics also requires the maintenance of the related documentation and compliance with obligations related to accounting or internal management reports.
Anti-Corruption Policy
In order to ensure compliance with existing applicable Brazilian and international anti-corruption laws and minimize the risks associated with the same, the Company haswe have adopted an Anti-Corruption Policy (Política Anticorrupção). Our Anti-Corruption Policy was approved by our Board of Directors on December 10, 2020,February 27, 2023, and focuses on internal mitigating controls to be followed to avoid vulnerability to corrupt practices, including our relationship with public officials. In conjunction with the adoption of this Anti-Corruption Policy, we also provide anti-corruption training courses to our managers, directors and employees. We were the first Brazilian telecom company nominated Pro-Etica. In December 2021, we were included for the second consecutive time on the Pro-Ethics Company List, now for the 2020-2021 period.
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In December 2019, TIM Participações, which was subsequently merged into the Companyus in September 2020, was included on the Pro-Ethics Company List for the 2018-2019 period by the Brazilian Federal Ministry of Transparency and the Comptroller General of the Union, which promotes ethical business conduct throughout Brazil, granting the
inclusion on the pro-ethic List to companies that demonstrate lawful business practices and operate with the highest level of fairness, transparency and integrity.
In this perspective, our Integrity Program aims to identify processes and controls to mitigate corrupt practices in order to generally promote honest and ethical conduct, and deter wrongdoing within the Company. We believe that the provisions of the Integrity Program is align with Legislative Decree No. 231/01 of Italy, the Brazilian Anti-Corruption Law and international standards on anti-corruption, such as the Foreign Corrupt Practices Act and the UK Bribery Act 2010.
Item 16C. | Principal Accountant Fees and Services |
Audit and Non-Audit Fees
The following table sets forth the fees billed to us by our independent auditorsregistered public accounting firm during the years ended December 31, 20202022 and 2019,2021, Ernst & Young Auditores Independentes S.S.S/S Ltda.:
Year ended December 31, | Year ended December 31, | |||
2020 | 2019 | 2022 | 2021 | |
(in thousands of reais) | (in thousands of reais) | |||
Audit fees | 7,751 | 5,419 | 8,995 | 6,940 |
Audit-related fees | 97 | 90 | 158 | 130 |
Tax fees | — | — | ||
All other fees | — | — | ||
Total fees | 7,848 | 5,509 | 9,153 | 7,070 |
Audit fees in the above table are the aggregate fees billed by Ernst & Young Auditores Independentes S.S.S/S Ltda., in connection with the audit of our annual financial statements and limited reviews of our quarterly financial information for statutory purposes and the assessment required under Section 404 of the Sarbanes-Oxley Act.
In 2020,2022, our independent auditorsregistered public accounting firm provided audit and audit-related services other than in connection with the audit of our financial statements. Such services included the review of the information and providing external audit services on our sustainability report.
Audit Committee Pre-Approval Policies and Procedures
The general authority to pre-approve the engagement of our independent auditors to render non-audit services is under the purview of our Statutory Audit Committee. Accordingly, the Statutory Audit Committee has established pre-approval procedures to control the provision of all audit and non-audit services by our independent auditors,registered public accounting firm, or the Pre-Approval Policy. Under the Pre-Approval Policy, the engagement of our independent auditorsregistered public accounting firm to provide audit and non-audit services must be pre-approved by the Statutory Audit Committee, either in the form of a special approval or through the inclusion of the services in question in a list adopted by the Statutory Audit Committee of pre-approved services. The Pre-Approval Policy is detailed as to the particular services to be provided.
Additionally, the Pre-Approval Policy affirms that the Statutory Audit Committee’s responsibilities under the Securities Exchange Act of 1934 are not delegated to management. All non-audit services provided by the Group’s principal auditingregistered public accounting firm were approved by the audit committee, and all such non-audit services to be provided in the future will also require approval from the audit committee.
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Item 16D. | Exemptions from the Listing Standards for Audit Committees |
Not applicable. We have created a Statutory Audit Committee in accordance with Exchange Act Rule 10A-3 and CVM Instruction 509/2011.Resolution 23/2021.
For more details, see “Item 6. Directors, Senior Management and Employees—A. Directors and Senior Management—Statutory Audit Committee.”
Item 16E. | Purchases of Equity Securities by the Issuer and Affiliated Purchasers |
None.
Item 16F. | Change in Registrant’s Certifying Accountant |
None.
Item 16G. | Corporate Governance |
Principal Differences Between Brazilian and U.S. Corporate Governance Practices
The significant differences between our corporate governance practices and those of the NYSE are as follows:
Independence of Directors and Independence Tests
Neither our Board of Directors nor our management tests the independence of directors before elections are made. However, both Brazilian corporate law and the CVM establish rules for certain qualification requirements and restrictions, investiture, compensation, and duties and responsibilities of the companies’ executives and directors. We believe these rules provide adequate assurances that our directors are independent, and they permit us to have directors that would not otherwise pass the independence tests established by the NYSE.
Executive Sessions
According to Brazilian corporate law, up to one-third of the members of the Board of Directors can be elected for executive positions. The remaining non-management directors are not expressly empowered to serve as a check on management and there is no requirement that those directors meet regularly without management.
Committees
Even thoughSince we migrated to the B3's Novo Mercado, we are not required under applicable Braziliansubject to its rules on corporate lawgovernance, which include having a statutory or non-statutory audit committee. The Statutory Audit Committee was established on December 12, 2013, and in addition to that committee, we have three other such special advisory committees ofto the Board of Directors, we have three such committees:Directors: the Statutory AuditControl and Risks Committee the Compensation Committee and the Environmental, Social and Governance Committee. The Control and Risks Committee and the Compensation Committee. The first was implemented on December 12, 2013 and the last twoCommittee were implemented on September 30, 2008.2008 and the last one was implemented on December 10, 2020. Pursuant to our By-laws, our shareholders elect our directors at a general shareholders’ meeting. Our shareholders also establish compensation for our directors and statutory officers.
Audit Committee and Additional Requirements
The Statutory Audit Committee was created and its members appointed at the shareholders’ meeting held on December 12, 2013, in accordance with Rule 10A-3 under Section 301 of Sarbanes-Oxley and CVM Instruction 509/2011.Resolution 23/2021. The Statutory Audit Committee’s internal regulations were approved at the Board of Directors meeting held on December 23, 2013. After the merger of TIM Participações S.A. into the Company, the Statutory Audit Committee was created and approved at its shareholders’ meeting held on July 29, 2020.
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The Statutory Audit Committee is composed of at least three (3) and at the most five (5) members, all independent, and 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. Our Board of Directors may dismiss members of the Statutory Audit Committee at any time and without cause.
Shareholder Approval of Equity Compensation Plans
NYSE rules require that shareholders be given the opportunity to vote on all equity compensation plans and material revisions thereto, with limited exceptions. Under the Brazilian corporate law, shareholders must approve all stock option plans. In addition, any issuance of new shares that exceeds our authorized share capital is subject to shareholder approval.
Corporate Governance Guidelines
NYSE rules require that listed companies adopt and disclose corporate governance guidelines. Since we have migrated to the B3’s Novo Mercado, we are subject to those rules on corporate governance, which include a disclosure policy, a policy on publicizing acts or relevant facts, which requires the public disclosure of all relevant information pursuant to guidelines set forth by the CVM, as well as an insider trading policy, a policy on securities transactions, which, among other things, establishes blackout periods and requires insiders to inform management of all transactions involving our securities.
Code of Business Conduct and Ethics
NYSE rules require that listed companies adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or statutory officers. Applicable Brazilian law does not have a similar requirement.requirement, however B3's Novo Mercado listing segment does also require the adoption and disclosure of a code of conduct.
Item 16H. | Mine Safety Disclosure |
Not applicable.
Item 16I. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections |
Not applicable.
154 |
Item 17. | Financial Statements |
We have responded to Item 18.18 in lieu of this item.
Item 18. | Financial Statements |
See our audited consolidated financial statements beginning at page F-1.
Item 19. | Exhibit Index |
See our exhibit index found immediately preceding the exhibits filed herewith.
155 |
The following explanations are not intended as technical definitions, but to assist the general reader to understand certain terms as used in this annual report.
3G: The third generation of mobile telecommunications network technology that comply with the IMT-2000 standard as defined by the International Telecommunications Union (ITU).Union.
3GPP (3rd Generation Partnership Project): An entity that unites seven telecommunications standard development organizations to produce reports and specifications.
4G: The fourth generation of mobile telecommunications network technology succeeding 3G, which comply with the IMT-Advanced standard as defined by the International Telecommunications Union (ITU).Union.
5G: The fifth generation of wireless communications technologies supporting cellular data networks.
Access Network: The part of a telecommunications network which connects subscribers to their immediate service provider. It is contrasted with the core network, which connects local providers to each other.
Analog: A mode of transmission or switching which is not digital, e.g., the representation of voice, video or other modulated electrical audio signals which are not in digital form.
ARPU (Average Revenue Per User): A measure used in the mobile telecommunications industry to evaluate the revenue generated by customers.
Broadband services: Services characterized by a transmission speed of 2Mbps or more. According to international standards, these services are interactive services, including video telephone/videoconferencing (both point to point and multipoint).
Core Network: The central part of a telecommunication network that connects local providers to each other and provides various services to customers who are connected by the access network.
Channel: One of a number of discrete frequency ranges utilized by a radio base station.
Digital: A mode of representing a physical variable such as speech using digits 0 and 1 only. The digits are transmitted in binary form as a series of pulses. Digital networks allow for higher capacity and higher flexibility through the use of computer-related technology for the transmission and manipulation of telephone calls. Digital systems offer lower noise interference and can incorporate encryption as a protection from external interference.
EPC (Evolved Packet Core): A flat architecture used by network operators that provides a converged voice and data networking framework to connect users on a Long-Term Evolution (LTE) network.
FDD (Frequency Division Duplex): A technology used in wireless communications where the uplink and the downlink use a different frequency.
GB: A measure of the unit for digital information, representing one billion bytes.
GHz (Gigahertz): One billion cycles per second.
GSM (Global System Mobile): A standard of digital mobile telecommunications technology.
HetNet: A heterogeneous network is a network connecting computers and other devices with different operating systems and/or protocols.
Interconnection charge: Amount paid per minute charged by network operators for the use of their network by other network operators. Also known as an “access charge.”
IP network: A communication network that uses Internet Protocol (IP) to send and receive messages by delivering packets from the source host to the destination host based on the IP addresses in the packet headers.
156 |
IoT (Internet of Things): IoT is a system of interrelated computing devices, mechanical and digital machines provided with unique identifiers and the ability to transfer data over a network without requiring human-to-human or human-to-computer interaction.
kHz (Kilohertz): One thousand cycles per second.
LTE (Long-Term Evolution): A wireless broadband technology designed to support roaming Internet access via cell phones and handheld devices.
M2M (Machine to machine): refers to machine-to-machine communication, being able to interconnect network systems, both wired and wireless, to remote devices. In M2M communication, data is transferred and used, in real time, via fixed or mobile networks, from remote equipment/terminals for their monitoring, measurement and control.:
Massive-MIMO: Multiple-input multiple-output.Massive-MIMO (Multiple-input multiple-output): A wireless network that allows the transmitting and receiving of more than one data signal simultaneously over the same radio channel.
MB (Megabyte): A measure of the unit for digital information, representing one million bytes.
MBB (Mobile Broadband): Data transmission improvements for mobile broadband users through an expanded high-speed fiber optic network and new functionalities in the core and access networks.
MHz (Megahertz): One million cycles per second.
MMS: An enhanced version of SMS, which provides users with the capability to send, in a single message, multiple color images, sounds and different size text to another mobile phone or email account.
Mobile Packet Core: Architecture systems for supporting mobile technologies including 2G, 3G and 4G/LTE.
Mobile service: A mobile telecommunications service provided by means of a network of interconnected low powered radio base stations, each of which covers one small geographic cell within the total mobile telecommunications system service area.
MOU (Monthly Average Minutes of Usage): The monthly average number of minutes of use of each mobile phone user.
MVNO (Mobile Virtual Network Operator): is a wireless communications services provider that does not own the wireless network infrastructure over which it provides services to its customers.
NB-IoT (Narrowband Internet of Things): A low power wide area network radio technology standard to enable a wide range of cellular devices and services.
Network: An interconnected collection of elements. In a telephone network, these consist of switches connected to each other and to customer equipment. The transmission equipment may be based on fiber optic or metallic cable or point-to-point connections.
NFV (Network Functions Virtualization): The NFV paradigm allows both fixed and mobile network functions to become software applications, called VNF (Virtual Network Function), which the operator can instantiate on commercial servers, exploiting virtualization technologies, separating the link between hardware and software present in the current network devices.
O-RAN (Open Radio Access Network): Industry-wide standards for RAN interfaces that support interoperation between vendors’ equipment.
OTT (Over The Top): Media delivered and communication services provided through the Internet rather than traditional infrastructure.
PaaS, SaaS or IaaS: Platform as a service (PaaS), software as a service (SaaS), or infrastructure as a service (IaaS).
Penetration: The measurement of the take-up of services. At any date, the penetration is calculated by dividing the number of customers by the population to which the service is available and multiplying the quotient by 100.
RAN: A radio access network, or the wireless radio frequency-based portion of a network providing access from a mobile terminal device (transmitter/receiver) to the core, or backbone, network of the radio service provider and ultimately to the public switched telephone network or the Internet or other IP-based network.
157 |
Refarming: The repurposing of frequency bands that have historically been allocated for 2G mobile services.
RF (Radio Frequency): A rate of oscillation which corresponds to the frequency of radio waves, and the alternating currents which carry radio signals.
Roaming: A function that enables customers to use their mobile telephone on networks of service providers other than the one with which they signed their initial contract.
SCM (Serviço de Comunicação Multimídia): Fixed telecommunications service of collective interest, provided nationally and internationally, in the private regime, which allows the provision of capacity for transmission, emission and reception of multimedia information (data, voice and image), using any means, to subscribers within a service delivery area.
SIM (Subscriber Identity Module) card: An integrated circuit intended to securely store the identity and authenticate users of mobile devices.
SLP (Serviço Limitado Privado): Limited, telephone, telegraphic, data transmission or any other form of telecommunications service, intended for the performer's own use, whether a natural or legal person.
SMS (Short Message Services): Two-way short (or text) message services, allowing users to send and receive short messages to and from users of networks of other carriers.
STFC (Serviço Telefônico Fixo Comutado): Provision of fixed telephony services in Brazil. It considers modalities of the Fixed Switched Telephone Service: local service, national long-distance service and international long-distance service.
TAC (Termo de AjustramentoAjustamento de Conduta): it is an agreement signed between the interested parties with the objective of protecting rights of a transindividual nature.
UMTS (Universal Mobile Telecommunications System): A third-generation mobile communication standard in which data travels at 2 Mbps over a broadband system.
Value-Added Services: Value-added services provide additional functionality to the basic transmission services offered by a telecommunications network.
VoIP (Voice over Internet Protocol): Voice communication services provided over the Internet.
WAP (Wireless Application Protocol): A specification for a set of telecommunications protocols to standardize the way that wireless devices, such as mobile telephones and radio receivers, can be used to access the Internet.
WTTx (Wireless to the x): The use of wireless technologies to provide fiber optic-like connections to end users.
YoY (Year-over-year): Is a method of evaluating two or more measured events to compare the results at one period with those of a comparable period on an annualized basis.
158 |
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
Dated: April 30, 202128, 2023
TIM S.A. | ||
By: | /s/ | |
Name: | ||
Title: | Chief Executive | |
EXHIBIT INDEX
* | Filed herewith. |
TIM S.A.
Consolidated Financial Statements as at
December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020 and Reports of Independent Registered Public Accounting Firm
TIM S.A.
CONSOLIDATED FINANCIAL STATEMENTS
As at December 31, 2020 and 2019 and for each of the
three years in the period ended December 31, 2020
Contents
Consolidated Financial Statements December 31, 2022 with Reports of Independent Registered Public Accounting Firm | |
| |
TIM S.A.
Consolidated Financial Statements
December 31, 2022
Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of TIM S.A.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of TIM S.A. (the “Company”) as of December 31, 20202022 and 2019,2021, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2020 and 2019,2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20202022 and 2019,2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 and 2019,2022, in conformity with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board.
We also have audited the effects of the corporate reorganization described in Note 2 and the Company´s conclusion that such corporate reorganization did not have an impact on the comparative figures of the consolidated financial statements. We were not engaged to audit, review or apply any procedures to the consolidated financial statements for the year in the period ended on December 31, 2018, other than with respect to the assessment of the eventual retrospective application of the common control transaction described in Note 2 and, accordingly, we do not express an opinion or any other form of assurance on the December 31, 2018 consolidated financial statements taken as a whole.Board - IASB.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020,2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated April 30, 202128, 2023 expressed an unqualified opinion thereon.
Adoption of IFRS 16, Leases
Effective on January 1, 2019, the Company changed its method of accounting for leases as a result of the adoption of IFRS 16, Leases.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
F-1 |
Critical Audit MatterMatters
The critical audit mattermatters communicated below is a matterare matters arising from the current period audit of the financial statements that waswere communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit mattermatters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit mattermatters below, providing a separate opinion on the critical audit mattermatters or on the accounts or disclosures to which it relates.they relate.
Provision for tax
| |
Description of the Matter
| As disclosed in note
Auditing management’s assessment of the probability of a loss on tax claims is complex, judgmental and based on interpretations of tax laws and legal rulings, as there is significant estimation uncertainty related to the ultimate outcome of court decisions, the evolution of jurisprudence and the position of the tax authorities.
|
How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the identification and evaluation of tax claims, including management’s process to determine whether the technical merits are more-likely-than-not to be sustained in court and over the generation of the
To test the Company’s assessment of the probability of losses over tax claims, our audit procedures included, among others, involving our tax professionals to assess the Company’s technical merits regarding certain matters in dispute, obtaining and analyzing external legal opinions, obtaining internal and external legal counsel confirmation letters, meeting with internal legal counsel to discuss certain tax disputes, and obtaining a representation letter from the Company’s internal legal counsel. We also assessed the adequacy of the disclosures made by the Company with respect to the provision for tax related contingencies.
|
Acquisition of Cozani RJ Infraestrutura e Rede de Telecomunicações S.A. (“Cozani”) | |
Description of the Matter | As disclosed in the note 1.2.1. to the consolidated financial statements, the Company acquired 100% of the shares of the Cozani for a purchased consideration of R$7,212 million. The acquisition was accounted for as a business combination. Therefore, the Company estimated the fair value of assets acquired and liabilities assumed as well as estimated its contingent consideration using valuation models and assumptions about future business performance (including revenue growth rates and annual churn).
Auditing the Company’s business combination accounting is complex and involved significant auditor judgment due to the significant estimation uncertainty related to the assumptions used by management in determining the fair value of assets acquired and liabilities assumed. Management projections and underlying assumptions are forward looking and could be affected by future economic events and market conditions.
|
How We Addressed the Matter in Our Audit | |
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s accounting process for business combination, including controls over the identification, recognition and measurement of the fair value of assets acquired and liabilities assumed and we also tested management´s controls over evaluation of underlying assumptions such as revenue growth and annual churn.
To test the estimated fair value of assets acquired and liabilities assumed, our audit procedures included, among others, assessing the Company's financial information forecast model and the significant assumptions used by the Company, testing the completeness and accuracy of the underlying data, comparing significant assumptions to market and economic trends and industry benchmarks and involving our valuation specialists to assist with the evaluation of the methodologies and models applied by management. We also assessed the disclosures made by the Company with respect to the business combination disclosed in the note 1.2.1.
/s/ Ernst & Young Auditores Independentes S.S.S/S Ltda.
We have served as the Company´s auditor since 2019.
Rio de Janeiro, Brazil
April 30, 2021
28, 2023
F-2 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of TIM S.A.
Opinion on Internal Control over Financial Reporting
We have audited TIM S.A.’’s internal control over financial reporting as of December 31, 2020,2022, based on criteria established in the Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, the TIM S.A. (the “Company”) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020,2022, based on the COSO criteria.
As indicated in the accompanying Management’s Annual Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Cozani RJ Infraestrutura e Redes de Telecomunicações S.A. (“Cozani”), which is included in the 2022 consolidated financial statements of the Company and constituted approximately 10% and 4% of total and net assets, respectively, as of December 31, 2022, and approximately 3% of Company’s total revenue for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Cozani.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 20202022 and 2019,2021, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the twothree years in the period ended December 31, 2020,2022, and the related explanatory notes and our report dated April 30, 202128, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company´sCompany’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company´sCompany’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
F-3 |
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
DefinitionsDefinition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young Auditores Independentes S.S.S/S Ltda.
Rio de Janeiro, Brazil
April 30, 202128, 2023
F-4 |
Report of Independent Registered Public Accounting Firm
TIM S.A. | ||||
CONSOLIDATED BALANCE SHEETS | ||||
December 31, 2022 and December 31, 2021 | ||||
(In thousands of reais) | ||||
Notes | 2022 | 2021 | ||
Assets | 56,408,367 | 49,819,186 | ||
Current assets | 10,364,415 | 15,398,048 | ||
Cash and cash equivalents | 4 | 2,548,713 | 5,228,615 | |
Marketable securities | 5 | 2,190,635 | 4,568,020 | |
Trade accounts receivable | 6 | 3,421,094 | 3,066,906 | |
Inventories | 7 | 236,117 | 202,553 | |
Recoverable indirect taxes, charges and contributions | 8 | 472,202 | 354,620 | |
Recoverable direct taxes, charges and contributions | 9 | 720,808 | 1,311,906 | |
Prepaid expenses | 11 | 278,851 | 275,148 | |
Derivative financial instruments | 39 | 239,189 | 134,292 | |
Leases | 17 | 30,643 | 30,076 | |
Other amounts recoverable | 18 | 26,519 | 28,661 | |
Other assets | 13 | 199,644 | 197,251 | |
Non-current assets | 46,043,952 | 34,421,138 | ||
Marketable securities | 5 | 12,929 | 11,508 | |
Trade accounts receivable | 6 | 238,683 | 186,301 | |
Recoverable indirect taxes, charges and contributions | 8 | 895,408 | 905,312 | |
Recoverable direct taxes, charges and contributions | 9 | 517,878 | 730,455 | |
Deferred income tax and social contribution | 10 | 1,367,586 | 536,888 | |
Judicial deposits | 12 | 1,377,560 | 718,773 | |
Prepaid expenses | 11 | 80,258 | 83,139 | |
Derivative financial instruments | 39 | 662,433 | 521,627 | |
Leases | 17 | 208,003 | 213,045 | |
Other assets | 13 | 65,398 | 18,908 | |
Investment | 14 | 1,540,116 | 1,601,703 | |
Property, plant and equipment | 15 | 22,661,152 | 18,308,400 | |
Intangible assets | 16 | 16,416,548 | 10,585,079 |
To the Board of Directors and Shareholders of TIM S.A.
Opinion on the Financial Statements
We have audited the consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows of TIM Participações S.A. and its subsidiaries (the “Company”) for the year ended December 31, 2018(collectively referred to as the “consolidated financial statements”) prior to any adjustments relating to the corporate reorganization discussed in Note 2. In our opinion, the consolidated financial statements for the year ended December 31, 2018, before the effects of the adjustments to retrospectively reflect the corporate reorganization described in Note 2, present fairly, in all material respects, the results of operations and cash flows of the Company for the year ended December 31, 2018 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board (the 2018 financial statements before the effects of the adjustments presented in Note 2The accompanying notes are not presented herein).
We were not engaged to audit, review, or apply any procedures to the adjustments to retrospectively reflect the corporate reorganization described in Note 2 and, accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by other auditors.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatementintegral part of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers Auditores Independentes
Rio de Janeiro, RJ, Brazil
April 10, 2019
We served as the Company's auditor from 2010 to 2019.
F-5 |
TIM S.A. | ||||
CONSOLIDATED BALANCE SHEETS | ||||
December 31, 2020 and 2019 | ||||
(In thousands of reais) | ||||
Note | 2020 | 2019 | ||
Assets | 41,654,417 | 40,348,924 | ||
Current assets | 10,411,556 | 8,454,129 | ||
Cash and cash equivalents | 4 | 2,575,291 | 2,284,810 | |
Marketable securities | 5 | 2,070,438 | 654,479 | |
Trade accounts receivable | 6 | 3,051,834 | 3,184,780 | |
Inventories | 7 | 246,602 | 203,278 | |
Recoverable indirect taxes, charges and contributions | 8 | 374,015 | 420,284 | |
Recoverable direct taxes, charges and contributions | 9 | 1,421,112 | 1,395,193 | |
Prepaid expenses | 11 | 149,796 | 175,868 | |
Derivative financial instruments | 36 | 262,666 | 16,602 | |
Leases | 15 | 5,357 | 4,931 | |
Regulatory credits recoverable | 16 | 43,906 | 33,090 | |
Other | 210,539 | 80,814 | ||
Non-current assets | 31,242,861 | 31,894,795 | ||
Marketable securities | 5 | 7,061 | 3,849 | |
Trade accounts receivable | 6 | 128,827 | 103,075 | |
Recoverable indirect taxes, charges and contributions | 8 | 856,786 | 823,349 | |
Recoverable direct taxes, charges and contributions | 9 | 1,277,127 | 2,367,607 | |
Deferred income tax and social contribution | 10 | 550,646 | - | |
Judicial deposits | 12 | 794,755 | 1,006,899 | |
Prepaid expenses | 11 | 73,598 | 69,656 | |
Derivative financial instruments | 36 | 239,423 | 29,909 | |
Leases | 15 | 156,841 | 151,447 | |
Other | 30,024 | 58,514 | ||
Property, plant and equipment | 13 | 18,100,698 | 17,612,164 | |
Intangible assets | 14 | 9,027,075 | 9,668,326 |
TIM S.A. | ||||
CONSOLIDATED BALANCE SHEETS | ||||
December 31, 2022 and December 31, 2021 | ||||
(In thousands of reais) | ||||
Notes | 2022 | 2021 | ||
Total liabilities and shareholders' equity | 56,408,367 | 49,819,186 | ||
Total liabilities | 31,011,002 | 24,712,080 | ||
Current liabilities | 13,118,009 | 10,611,482 | ||
Suppliers | 19 | 4,237,229 | 3,267,404 | |
Loans and financing | 21 | 1,264,967 | 538,450 | |
Lease liabilities | 17 | 2,257,211 | 1,269,878 | |
Derivative financial instruments | 39 | 343,142 | 194,837 | |
Payroll and related charges | 343,541 | 303,239 | ||
Indirect taxes, charges and contributions payable | 22 | 2,093,734 | 1,418,682 | |
Direct taxes, charges and contributions payable | 23 | 262,344 | 245,113 | |
Dividends and interest on shareholders’ equity payable | 27 | 661,494 | 533,580 | |
Authorizations payable | 20 | 507,685 | 2,630,169 | |
Deferred revenues | 24 | 265,417 | 197,179 | |
Other contractual obligations | 1.2.1 | 748,291 | - | |
Other liabilities | 26 | 132,954 | 12,951 | |
Non-current liabilities | 17,892,993 | 14,100,598 | ||
Loans and financing | 21 | 3,704,858 | 3,307,015 | |
Derivative financial instruments | 39 | 50,230 | 13,950 | |
Lease liabilities | 17 | 10,574,654 | 7,793,661 | |
Indirect taxes, charges and contributions payable | 22 | 3,734 | 3,273 | |
Direct taxes, charges and contributions payable | 23 | 9,806 | 13,227 | |
Provision for legal and administrative proceedings | 25 | 1,112,156 | 960,881 | |
Pension plans and other post-employment benefits | 40 | 5,825 | 6,492 | |
Authorizations payable | 20 | 1,165,705 | 1,250,918 | |
Deferred revenues | 24 | 666,612 | 689,161 | |
Other liabilities | 26 | 599,413 | 62,020 | |
Shareholders’ equity | 27 | 25,397,365 | 25,107,106 | |
Share Capital | 13,477,891 | 13,477,891 | ||
Capital reserves | 408,602 | 401,806 | ||
Profit reserves | 11,514,879 | 11,236,551 | ||
Other comprehensive income | (3,844) | (4,285) | ||
Treasury shares | (163) | (4,857) | ||
The accompanying notes are an integral part of the consolidated financial statements.
F-6 |
TIM S.A. | |||||||
CONSOLIDATED STATEMENTS OF INCOME | |||||||
Years ended December 31, 2022, 2021 and 2020 | |||||||
(In thousands of reais, except as otherwise stated) | |||||||
Notes | 2022 | 2021 | 2020 | ||||
Revenue | 29 | 21,530,801 | 18,058,027 | 17,267,812 | |||
Costs of services provided and goods sold | 30 | (10,655,981) | (8,443,023) | (7,996,615) | |||
Gross income | 10,874,820 | 9,615,004 | 9,271,197 | ||||
Operating income (expenses): | |||||||
Selling expenses | 30 | (5,596,211) | (4,621,788) | (4,443,027) | |||
General and administrative expenses | 30 | (1,808,735) | (1,723,384) | (1,673,290) | |||
Share of loss of an associate | 14 | (61,587) | (11,572) | - | |||
Other income (expenses), net | 31 | (248,371) | 497,771 | (351,854) | |||
Total operating expenses | (7,714,904) | (5,858,973) | (6,468,171) | ||||
Profit before financial income and expenses | 3,159,916 | 3,756,031 | 2,803,026 | ||||
Financial income (expenses): | |||||||
Financial income | 32 | 1,318,948 | 1,091,748 | 438,598 | |||
Financial expenses | 33 | (2,762,963) | (1,745,213) | (1,242,255) | |||
Foreign exchange variations, net | 34 | 5,007 | 659 | (6,965) | |||
Total financial income(expenses) | (1,439,008) | (652,806) | (810,622) | ||||
Profit before income tax and social contribution | 1,720,908 | 3,103,225 | 1,992,404 | ||||
Income tax and social contribution | 35 | (50,153) | (146,051) | (164,150) | |||
Profit for the year | 1,670,755 | 2,957,174 | 1,828,254 | ||||
Earnings per share attributable to the Company’s shareholders (expressed in R$ per share) | |||||||
Basic earnings per share | 36 | 0.7 | 1.22 | 0.76 | |||
Diluted earnings per share | 36 | 0.7 | 1.22 | 0.76 |
The accompanying notes are an integral part of the consolidated financial statements.
TIM S.A. | ||||
CONSOLIDATED BALANCE SHEETS | ||||
December 31, 2020 and 2019 | ||||
(In thousands of reais) | ||||
Note | 2020 | 2019 | ||
Total liabilities and shareholders' equity | 41,654,417 | 40,348,924 | ||
Total liabilities | 18,471,672 | 17,917,106 | ||
Current liabilities | 8,301,956 | 8,117,479 | ||
Suppliers | 17 | 3,128,732 | 3,923,035 | |
Loans and financing | 19 | 1,689,385 | 1,384,180 | |
Leases | 15 | 1,054,709 | 873,068 | |
Derivative financial instruments | 36 | 7,273 | 858 | |
Labor obligations | 272,635 | 218,421 | ||
Indirect taxes, charges and contributions payable | 20 | 935,778 | 463,606 | |
Direct taxes, charges and contributions payable | 21 | 296,299 | 296,305 | |
Dividends and interest on shareholders’ equity payable | 24 | 538,576 | 577,837 | |
Authorizations payable | 18 | 102,507 | 88,614 | |
Deferred revenues | 22 | 266,436 | 281,930 | |
Other | 9,626 | 9,625 | ||
Non-current liabilities | 10,169,716 | 9,799,627 | ||
Loans and financing | 19 | 655,647 | 644,908 | |
Derivative financial instruments | 36 | 28,893 | 3,547 | |
Leases | 15 | 7,324,126 | 6,907,802 | |
Indirect taxes, charges and contributions payable | 20 | 3,102 | 2,997 | |
Direct taxes, charges and contributions payable | 21 | 212,444 | 212,310 | |
Deferred income tax and social contribution | 10 | - | 47,734 | |
Provision for legal and administrative proceedings | 23 | 886,947 | 840,637 | |
Pension plan and other post-employment benefits | 37 | 7,346 | 5,782 | |
Authorizations payable | 18 | 232,940 | 237,723 | |
Deferred revenues | 22 | 755,488 | 827,182 | |
Other | 62,783 | 69,005 | ||
Shareholders' equity | 24 | 23,182,745 | 22,431,818 | |
Share capital | 13,477,891 | 9,866,298 | ||
Capital reserves | 397,183 | 410,650 | ||
Profit reserve | 9,317,356 | 12,159,162 | ||
Equity valuation adjustments | (4,848) | (1,088) | ||
Treasury shares | (4,837) | (3,204) |
The accompanying notes are an integral part of the consolidated financial statements.
TIM S.A. | ||||||||
CONSOLIDATED STATEMENTS OF INCOME | ||||||||
Years ended December 31, 2020, 2019 and 2018 | ||||||||
(In thousands of reais, unless otherwise indicated) | ||||||||
Notes | 2020 | 2019 | 2018 | |||||
Revenue | 26 | 17,267,812 | 17,377,194 | 16,981,329 | ||||
Cost of services provided and products sold | 27 | (7,996,615) | (7,433,731) | (7,701,418) | ||||
Gross income | 9,271,197 | 9,943,463 | 9,279,911 | |||||
Operating income (expenses) | ||||||||
Selling expenses | 27 | (4,443,027) | (4,986,289) | (4,970,780) | ||||
General and administrative expenses | 27 | (1,673,290) | (1,717,859) | (1,608,319) | ||||
Other income (expenses) | 28 | (351,854) | 1,275,542 | (283,289) | ||||
(6,468,171) | (5,428,606) | (6,862,388) | ||||||
Operating income | 2,803,026 | 4,514,857 | 2,417,523 | |||||
Financial income (expenses): | ||||||||
Financial income | 29 | 438,598 | 1,430,171 | 412,733 | ||||
Financial expenses | 30 | (1,242,255) | (1,408,053) | (951,439) | ||||
Foreign exchange variations | 31 | (6,965) | (908) | 1,373 | ||||
(810,622) | 21,210 | (537,333) | ||||||
Income before income tax and social contribution | 1,992,404 | 4,536,067 | 1,880,190 | |||||
Income tax and social contribution | 32 | (164,150) | (913,940) | 664,911 | ||||
Net income for the year | 1,828,254 | 3,622,127 | 2,545,101 | |||||
Earnings per share attributable to Company's shareholders (in R$ per share) | ||||||||
Basic earnings per share | 33 | 0.76 | 1.50 | 1.05 | ||||
Diluted earnings per share | 33 | 0.76 | 1.50 | 1.05 |
The accompanying notes are an integral part of the consolidated financial statements.
TIM S.A. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | ||||||
Years ended December 31, 2020, 2019 and 2018 | ||||||
(In thousands of reais) | ||||||
2020 | 2019 | 2018 | ||||
Net income for the year | 1,828,254 | 3,622,127 | 2,545,101 | |||
Other components of the comprehensive income | ||||||
Item that will not be reclassified to income (loss): | ||||||
Pension plans and other post-employment benefits | (1,562) | (2,932) | (215) | |||
Deferred taxes | 531 | 997 | 73 | |||
Total comprehensive income for the year | 1,827,223 | 3,620,192 | 2,544,959 |
The accompanying notes are an integral part of the consolidated financial statements
TIM S.A. | ||||||||||||||||||
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY | ||||||||||||||||||
Year ended December 31, 2020, 2019 and 2018 | ||||||||||||||||||
(In thousands of reais) | ||||||||||||||||||
Profit reserves | ||||||||||||||||||
Capital Stock | Capital reserve | Legal reserve | Reserve for expansion | Tax benefit reserve | Treasury shares | Accumulated other comprehensive income | Retained earnings | Total | ||||||||||
Balances at January 01, 2020 | 9,866,298 | 410,650 | 1,010,090 | 9,537,053 | 1,612,019 | (3,204) | (1,088) | - | 22,431,818 | |||||||||
Total comprehensive income for the year | ||||||||||||||||||
Net income for the year | - | - | - | - | - | - | - | 1,828,254 | 1,828,254 | |||||||||
Other comprehensive income | - | - | - | - | - | - | (1,031) | - | (1,031) | |||||||||
Total comprehensive income for the year | - | - | - | - | - | - | (1,031) | 1,828,254 | 1,827,223 | |||||||||
Total contribution from shareholders and distribution to shareholders | ||||||||||||||||||
Corporate restructure (note 1) | 3,611,593 | (20,892) | (57,604) | (3,535,824) | 5,456 | (2,729) | - | - | ||||||||||
Stock options (note 24.b) | - | 7,425 | - | - | - | - | 7,425 | |||||||||||
Purchase of treasury shares, net of disposals | - | - | - | - | (7,089) | - | - | (7,089) | ||||||||||
Allocation of net income for the year (note 24): | ||||||||||||||||||
Legal reserve (note 24) | - | - | 83,708 | - | - | (83,708) | - | |||||||||||
Interest on equity (note 24) | - | - | - | - | (1,083,000) | (1,083,000) | ||||||||||||
Tax incentive reserve (note 24) | - | - | 169,541 | - | (169,541) | - | ||||||||||||
Expansion reserve (note 24) | - | - | - | 492,005 | - | (492,005) | - | |||||||||||
Unclaimed dividends (note 24) | - | - | - | 6,368 | - | - | 6,368 | |||||||||||
- | ||||||||||||||||||
Total contribution from shareholders and distribution to shareholders | 3,611,593 | (13,467) | 26,104 | (3,037,451) | 169,541 | (1,633) | (2,729) | (1,828,254) | (1,076,296) | |||||||||
Balances at December 31, 2020 | 13,477,891 | 397,183 | 1,036,194 | 6,499,602 | 1,781,560 | (4,837) | (4,848) | - | 23,182,745 |
The accompanying notes are an integral part of the consolidated financial statements.
TIM S.A. | ||||||||||||||||||
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY | ||||||||||||||||||
Fiscal years ended December 31, 2020, 2019 and 2018 | ||||||||||||||||||
(In thousands of Reais) | ||||||||||||||||||
Profit reserves | ||||||||||||||||||
Capital Stock | Capital reserves | Legal reserve | Reserve for expansion | Tax benefit reserve | Treasury shares | Accumulated other comprehensive income | Retained earnings | Total | ||||||||||
Balances as at December 31, 2018 | 9,866,298 | 412,091 | 838,692 | 7,267,574 | 1,417,858 | (8,523) | 847 | - | 19,794,837 | |||||||||
Total comprehensive income for the year | ||||||||||||||||||
Net income for the year | 3,622,127 | 3,622,127 | ||||||||||||||||
Remeasurement of post-employment benefit obligation | - | - | - | - | - | - | (1,935) | - | (1,935) | |||||||||
Total comprehensive income for the year | - | - | - | - | - | - | (1,935) | 3,622,127 | 3,620,192 | |||||||||
Total contributions from shareholders and distributions to shareholders | ||||||||||||||||||
Stock options (Note 24.b) | - | (1,441) | - | - | - | - | - | (1,441) | ||||||||||
Purchases of treasury shares, net of disposals | - | - | - | - | 5,319 | - | - | 5,319 | ||||||||||
Allocation of net profit for the year: | ||||||||||||||||||
Legal Reserve (note 24) | - | - | 171,398 | - | - | - | (171,398) | - | ||||||||||
Interest on equity (note 24) | - | - | - | - | - | (995,438) | (995,438) | |||||||||||
Tax benefit reserve (note 24) | - | - | - | 194,161 | - | - | (194,161) | - | ||||||||||
Reserve for expansion (note 24) | - | - | - | 2,261,130 | - | - | (2,261,130) | - | ||||||||||
Unclaimed dividends (note 24) | - | - | - | 8,349 | - | - | - | 8,349 | ||||||||||
Total contributions from shareholders and distributions to shareholders | - | (1,441) | 171,398 | 2,269,479 | 194,161 | 5,319 | - | (3,622,127) | (983,211) | |||||||||
Balances as at December 31, 2019 | 9,866,298 | 410,650 | 1,010,090 | 9,537,053 | 1,612,019 | (3,204) | (1,088) | - | 22,431,818 |
TIM S.A. | ||||||
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | ||||||
Years ended December 31, 2022, 2021 and 2020 | ||||||
(In thousands of reais) | ||||||
2022 | 2021 | 2020 | ||||
Profit for the year | 1,670,755 | 2,957,174 | 1,828,254 | |||
Other comprehensive income | ||||||
Item that will not be reclassified to profit or loss in subsequent periods: | ||||||
Pension plans and other post-employment benefits | 667 | 853 | (1,562) | |||
Deferred taxes | (227) | (290) | 531 | |||
Total comprehensive income for the year, net of tax | 1,671,195 | 2,957,737 | 1,827,223 |
The accompanying notes are an integral part of the consolidated financial statements.
TIM S.A. | ||||||||||||||||||
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY | ||||||||||||||||||
Fiscal years ended December 31, 2020, 2019 and 2018 | ||||||||||||||||||
(In thousands of Reais) | ||||||||||||||||||
Profit reserves | ||||||||||||||||||
Capital Stock | Capital reserves | Legal reserve | Reserve for expansion | Tax benefit reserve | Treasury shares | Accumulated other comprehensive income | Retained earnings | Total | ||||||||||
Balances as at December 31, 2017 | 9,866,298 | 416,162 | 718,759 | 5,831,941 | 1,271,403 | (16,487) | 989 | - | 18,089,065 | |||||||||
Total comprehensive income for the year | ||||||||||||||||||
Net income for the year | 2,545,101 | 2,545,101 | ||||||||||||||||
Remeasurement of post-employment benefit obligation | - | - | - | - | - | - | (142) | - | (142) | |||||||||
Total comprehensive income for the year | - | - | - | - | - | - | (142) | 2,545,101 | 2,544,959 | |||||||||
Total contributions from shareholders and distributions to shareholders | ||||||||||||||||||
Stock options (Note 24.b) | - | (4,071) | - | - | - | - | - | (4,071) | ||||||||||
Purchases of treasury shares, net of disposals | - | - | - | - | 7,964 | - | - | 7,964 | ||||||||||
Allocation of net profit for the year: | ||||||||||||||||||
Legal Reserve (note 24) | - | - | 119,933 | - | - | - | (119,933) | - | ||||||||||
Interest on equity (note 24) | - | - | - | - | - | (849,994) | (849,994) | |||||||||||
Tax benefit reserve (note 24) | - | - | 146,455 | - | - | (146,455) | - | |||||||||||
Reserve for expansion (note 24) | - | - | - | 1,428,719 | - | - | (1,428,719) | - | ||||||||||
Unclaimed dividends (note 24) | - | - | - | 6,914 | - | - | - | 6,914 | ||||||||||
- | ||||||||||||||||||
Total contributions from shareholders and distributions to shareholders | - | (4,071) | 119,933 | 1,435,633 | 146,455 | 7,964 | - | (2,545,101) | (839,187) | |||||||||
Balances as at December 31, 2018 | 9,866,298 | 412,091 | 838,692 | 7,267,574 | 1,417,858 | (8,523) | 847 | - | 19,794,837 |
The accompanying notes are an integral part of the consolidated financial statements.
TIM S.A. | |||||||
STATEMENT OF CASH FLOWS | |||||||
Years ended December 31 | |||||||
(In thousands of reais) | |||||||
Note | 2020 | 2019 | 2018 | ||||
Operating activities | |||||||
Income before income tax and social contribution | 1,992,404 | 4,536,067 | 1,880,190 | ||||
Adjustments to reconcile income to net cash generated by operating activities: | |||||||
Depreciation and amortization | 5,527,012 | 5,128,981 | 3,954,321 | ||||
Residual value of written-off fixed and intangible assets | (88,085) | 32,411 | 9,700 | ||||
Interest on asset retirement obligation | (284) | 226 | 648 | ||||
Provision for administrative and judicial proceedings | 23 | 333,724 | 547,691 | 551,191 | |||
Inflation adjustment on deposits and administrative and judicial proceedings | 138,109 | 200,469 | 297,529 | ||||
Interest, inflation adjustment and foreign exchange variations on loans and other financial adjustments | 168,362 | (950,675) | (35,450) | ||||
Interest on lease payable | 30 | 910,691 | 821,463 | 266,328 | |||
Interest on lease receivable | 29 | (10,698) | (6,422) | (25,664) | |||
Provision for expected credit losses | 27 | 552,817 | 748,291 | 544,881 | |||
Stock options | 25 | 2,588 | 3,443 | (1,424) | |||
9,526,640 | 11,061,945 | 7,442,250 | |||||
Decrease (increase) in operating assets | |||||||
Trade accounts receivable | (390,087) | (1,027,131) | (1,028,791) | ||||
Recoverable taxes and contributions | 1,260,949 | (1,601,276) | 175,116 | ||||
Inventories | (43,325) | (20,219) | (59,274) | ||||
Prepaid expenses | 20,928 | 100,917 | 56,792 | ||||
Judicial deposits | 203,567 | 296,486 | 30,478 | ||||
Other assets | (111,003) | 5,059 | 133,831 | ||||
Increase (decrease) in operating liabilities | |||||||
Labor obligations | 53,667 | 6,736 | (50,765) | ||||
Suppliers | (818,989) | (401,200) | 331,736 | ||||
Taxes, fees and contributions | (320,674) | 40,045 | 187,170 | ||||
Authorizations payable | (10,871) | (100,182) | (104,582) | ||||
Payments of lawsuits and administrative proceedings | 23 | (413,635) | (715,203) | (536,646) | |||
Deferred revenues | (87,188) | (204,355) | (193,599) | ||||
Other liabilities | (126,530) | (215,063) | (40,373) | ||||
Cash generated by operations | 8,743,449 | 7,226,559 | 6,343,343 | ||||
Income tax and social contribution paid | (69,578) | (161,833) | (213,956) | ||||
Net cash generated by operating activities | 8,673,871 | 7,064,726 | 6,129,387 |
TIM S.A. and TIM S.A. and SUBSIDIARY | |||||||
STATEMENT OF CASH FLOWS | |||||||
Years ended December 31 | |||||||
(In thousands of reais) | |||||||
Note | 2020 | 2019 | 2018 |
Investing activities | |||||||
Marketable securities | (1,428,888) | 131,742 | (21,460) | ||||
Cash from the merger of TIM Participações | 21,959 | - | - | ||||
Additions to property, plant and equipment and intangible assets | (3,891,306) | (3,853,484) | (3,831,906) | ||||
Other derivatives | (161,429) | - | - | ||||
Proceeds received from leases | 4,879 | 9,100 | 22,946 | ||||
Net cash (invested in) generated by investment activities | (5,454,785) | (3,712,642) | (3,830,420) |
Financing activities | |||||||
New loans | 1,800,000 | 1,000,000 | 166,548 | ||||
Amortization of loans | (1,806,922) | (723,500) | (3,359,074) | ||||
Interest paid on loans | (72,643) | (96,649) | (193,333) | ||||
Leases payments | (927,903) | (800,621) | (9,898) | ||||
Interest paid on leases | (794,391) | (785,091) | (242,512) | ||||
Derivative financial instruments | 27,070 | 32,761 | 37,044 | ||||
Purchases of treasury shares, net of disposals | - | 435 | 5,317 | ||||
Dividends and interest on shareholders’ equity paid | (1,153,054) | (770,139) | (588,247) | ||||
Net cash invested in financing activities | (2,927,843) | (2,142,804) | (4,184,155) | ||||
Increase (decrease) in cash and cash equivalents | 291,243 | 1,209,280 | (1,885,188) | ||||
Cash and cash equivalents at the beginning of the year | 2,284,048 | 1,075,530 | 2,960,718 | ||||
Cash and cash equivalents at the end of the year | 2,575,291 | 2,284,810 | 1,075,530 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
F-8 |
TIM S.A. | |||||||||||||||||||||
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY | |||||||||||||||||||||
Years ended December 31, 2022, 2021 and 2020 | |||||||||||||||||||||
(In thousands of reais) | |||||||||||||||||||||
Profit reserves | |||||||||||||||||||||
Share Capital | Capital reserve | Legal reserve | Reserve for expansion | Additional dividends/interest on shareholders’ equity proposed | Tax incentive Reserve | Treasury shares | Equity valuation adjustments | Retained earnings | Total | ||||||||||||
Balances at January 01, 2022 | 13,477,891 | 401,806 | 1,175,215 | 8,103,035 | - | 1,958,301 | (4,857) | (4,285) | - | 25,107,106 | |||||||||||
Total comprehensive income for the year | |||||||||||||||||||||
Profit for the year | - | - | - | - | - | - | - | - | 1,670,755 | 1,670,755 | |||||||||||
Total shareholder contributions and distributions to shareholders | - | - | - | - | - | - | - | - | - | - | |||||||||||
Post-employment benefit amount recorded directly in shareholders' equity (Note 13) | - | - | - | - | - | 441 | - | 441 | |||||||||||||
Total comprehensive income for the year | - | - | - | - | - | - | - | 441 | 1,670,755 | 1,671,196 | |||||||||||
Total shareholder contributions and distributions to shareholders | |||||||||||||||||||||
Long-term incentive plan | - | 6,796 | - | - | - | - | - | 6,796 | |||||||||||||
Purchase of treasury shares, net of disposals | - | - | - | - | - | 4,694 | - | - | 4,694 | ||||||||||||
Allocation of net profit for the year: | |||||||||||||||||||||
Legal reserve (Note 27) | - | - | 75,233 | - | - | - | (75,233) | - | |||||||||||||
Interest on Shareholders’ Equity (Note 27) | - | - | - | - | - | (1,400,000) | (1,400,000) | ||||||||||||||
Allocation to tax benefit reserve (Note 27) | - | - | - | - | - | 166,110 | - | - | (166,110) | - | |||||||||||
Additional dividends/interest on shareholders’ equity proposed (Note 27) | - | - | - | (570,588) | 600,000 | - | - | - | (29,412) | - | |||||||||||
Unclaimed dividends | - | - | - | 7,573 | - | - | 7,573 | ||||||||||||||
Total shareholder contributions and distributions to shareholders | - | 6,796 | 75,233 | (563,015) | 600,000 | 166,110 | 4,694 | - | (1,670,755) | (1,380,937) | |||||||||||
Balances at December 31, 2022 | 13,477,891 | 408,602 | 1,250,448 | 7,540,020 | 600,000 | 2,124,411 | (163) | (3,844) | - | 25,397,365 | |||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-9 |
TIM S.A. | ||||||||||||||||||
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY | ||||||||||||||||||
Years ended December 31, 2022, 2021 and 2020 | ||||||||||||||||||
(In thousands of reais) | ||||||||||||||||||
Profit reserves | ||||||||||||||||||
Share capital | Capital reserve | Legal reserve | Reserve for expansion | Tax incentive reserve | Treasury shares | Equity valuation adjustments | Retained earnings | Total | ||||||||||
Balances at January 01, 2021 | 13,477,891 | 397,183 | 1,036,194 | 6,499,602 | 1,781,560 | (4,837) | (4,848) | - | 23,182,745 | |||||||||
Total comprehensive income for the year | ||||||||||||||||||
Profit for the year | - | - | - | - | - | - | - | 2,957,174 | 2,957,174 | |||||||||
Post-employment benefit amount recorded directly in shareholders' equity | - | - | - | - | 563 | - | 563 | |||||||||||
Total comprehensive income for the year | - | - | - | - | - | - | 563 | 2,957,174 | 2,957,737 | |||||||||
Total shareholder contributions and distributions to shareholders | ||||||||||||||||||
Long-term incentive plan | - | 4,623 | - | - | - | - | 4,623 | |||||||||||
Purchase of treasury shares, net of disposals | - | - | - | - | (20) | - | - | (20) | ||||||||||
Allocation of profit for the year: | ||||||||||||||||||
Legal reserve (Note 27) | - | - | 139,021 | - | - | (139,021) | - | |||||||||||
Interest on Shareholders’ Equity (Note 27) | - | - | - | - | (1,047,500) | (1,047,500) | ||||||||||||
Allocation to tax benefit reserve (Note 27) | - | - | 176,741 | - | (176,741) | - | ||||||||||||
Allocation to expansion reserve (Note 27) | - | - | - | 1,593,912 | - | (1,593,912) | - | |||||||||||
Unclaimed dividends (Note 27) | - | - | - | 9,521 | - | - | 9,521 | |||||||||||
Total shareholder contributions and distributions to shareholders | - | 4,623 | 139,021 | 1,603,433 | 176,741 | (20) | - | (2,957,174) | (1,033,376) | |||||||||
Balances at December 31, 2021 | 13,477,891 | 401,806 | 1,175,215 | 8,103,035 | 1,958,301 | (4,857) | (4,285) | - | 25,107,106 |
The accompanying notes are an integral part of the consolidated financial statements.
F-10 |
TIM S.A. | ||||||||||||||||||
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY | ||||||||||||||||||
Years ended December 31, 2022, 2021 and 2020 | ||||||||||||||||||
(In thousands of reais) | ||||||||||||||||||
Profit reserves | ||||||||||||||||||
Share capital | Capital reserve | Legal reserve | Reserve for expansion | Tax benefit reserve | Treasury shares | Other comprehensive income | Retained earnings | Total | ||||||||||
Balances at January 01, 2020 | 9,866,298 | 410,650 | 1,010,090 | 9,537,053 | 1,612,019 | (3,204) | (1,088) | - | 22,431,818 | |||||||||
Total comprehensive income for the year | ||||||||||||||||||
Profit for the year | - | - | - | - | - | - | - | 1,828,254 | 1,828,254 | |||||||||
Remeasurement of post-employment benefit obligation | - | - | - | - | - | - | (1,031) | - | (1,031) | |||||||||
Total comprehensive income for the year | - | - | - | - | - | - | (1,031) | 1,828,254 | 1,827,223 | |||||||||
Total contributions from shareholders and distributions to shareholders | ||||||||||||||||||
Corporate restructure (Note 1) | 3,611,593 | (20,892) | (57,604) | (3,535,824) | 5,456 | (2,729) | - | - | ||||||||||
Long-term incentive plan (Note 26) | - | 7,425 | - | - | - | - | 7,425 | |||||||||||
Purchase of treasury shares, net of disposals | - | - | - | - | (7,089) | - | - | (7,089) | ||||||||||
Allocation of profit for the year: | ||||||||||||||||||
Legal reserve (Note 27) | - | - | 83,708 | - | - | (83,708) | - | |||||||||||
Interest on shareholders’ equity (Note 27) | - | - | - | - | (1,083,000) | (1,083,000) | ||||||||||||
Tax incentive reserve (Note 27) | - | - | 169,541 | - | (169,541) | - | ||||||||||||
Reserve for expansion (Note 27) | - | - | - | 492,005 | - | (492,005) | - | |||||||||||
Unclaimed dividends (Note 27) | - | - | - | 6,368 | - | - | 6,368 | |||||||||||
- | ||||||||||||||||||
Total contributions from shareholders and distributions to shareholders | 3,611,593 | (13,467) | 26,104 | (3,037,451) | 169,541 | (1,633) | (2,729) | (1,828,254) | (1,076,296) | |||||||||
Balances at December 31, 2020 | 13,477,891 | 397,183 | 1,036,194 | 6,499,602 | 1,781,560 | (4,837) | (4,848) | - | 23,182,745 | |||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-11 |
TIM S.A. | |||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||
Years ended December 31, 2022, 2021 and 2020 | |||||||
(In thousands of reais) | |||||||
Notes | 2022 | 2021 | 2020 | ||||
Operating activities | |||||||
Profit before income tax and social contribution | 1,720,909 | 3,103,225 | 1,992,404 | ||||
Adjustments to reconcile income to net cash generated by operating activities: | |||||||
Depreciation and amortization | 6,827,175 | 5,691,696 | 5,527,012 | ||||
Share of loss of an associate | 14 | 61,587 | 11,572 | - | |||
Residual value of property, plant and equipment and intangible written off | (136,713) | 51,913 | (88,085) | ||||
Gain on sale transaction of 51% of I-Systems (formerly FiberCo) (Note 1) | - | (782,237) | - | ||||
Interest on asset retirement obligation | 23,212 | 1,486 | (284) | ||||
Provision for legal and administrative proceedings | 25 | 247,227 | 278,789 | 333,724 | |||
Inflation adjustment on judicial deposits and legal and administrative proceedings | 91,681 | (27,768) | 138,109 | ||||
Interest, monetary and exchange rate variations on loans and other financial adjustments | 759,989 | 119,864 | 168,362 | ||||
Interest on lease liabilities | 1,333,007 | 858,259 | 910,691 | ||||
Lease interest | (28,101) | 56 | (10,698) | ||||
Provision for expected credit losses | 30 | 626,218 | 544,642 | 552,817 | |||
Long-term incentive plans | 6,796 | 15,672 | 2,588 | ||||
Total adjustments to reconcile income with net cash from operations | 11,532,987 | 9,867,169 | 9,526,640 | ||||
Reduction (increase) in operating assets | |||||||
Trade accounts receivable | (628,272) | (583,346) | (390,087) | ||||
Taxes, fees and contributions to be recovered | 912,306 | 664,397 | 1,260,949 | ||||
Inventories | (33,565) | 44,050 | (43,325) | ||||
Prepaid expenses | 164,288 | (134,893) | 20,928 | ||||
Judicial deposits | (603,825) | 215,698 | 203,567 | ||||
Other assets | (30,709) | 41,610 | (111,003) | ||||
Increase (decrease) in operating liabilities | |||||||
Payroll and related charges | 40,302 | 35,506 | 53,667 | ||||
Suppliers | 757,628 | 153,357 | (818,989) | ||||
Taxes, fees and contributions to be collected | 102,948 | 366,605 | (320,674) | ||||
Authorizations payable | (2,378,796) | (8,604) | (10,871) | ||||
Payments for legal and administrative proceedings | 25 | (242,598) | (316,804) | (413,635) | |||
Deferred revenues | (49,446) | (135,583) | (87,188) | ||||
Other liabilities | (114,173) | (116,981) | (126,530) | ||||
Cash generated by operations | 9,429,075 | 10,092,181 | 8,743,449 | ||||
Income tax and social contribution paid | - | (14,094) | (69,578) | ||||
Net cash from operating activities | 9,429,075 | 10,078,087 | 8,673,871 | ||||
F-12 |
TIM S.A. | |||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||
Years ended December 31, 2022, 2021 and 2020 | |||||||
(In thousands of reais) | |||||||
Notes | 2022 | 2021 | 2020 | ||||
Investing activities | |||||||
Marketable securities | 2,375,964 | (2,502,030) | (1,428,888) | ||||
Cash from the sale of 51% of I-Systems (formerly FiberCo) (Note 1) | - | 1,096,294 | |||||
Cash from the merger of TIM Participações | - | - | 21,959 | ||||
Consideration for the acquisition of Cozani | (6,269,951) | - | - | ||||
Additions to property, plant and equipment and intangible | (4,730,433) | (5,283,707) | (3,891,306) | ||||
Other derivatives | - | - | (161,429) | ||||
Other | 4,475 | 47 | 4,879 | ||||
Net cash used in investing activities | (8,619,945) | (6,689,396) | (5,454,785) | ||||
Financing activities | |||||||
New loans | 1,568,343 | 3,062,000 | 1,800,000 | ||||
Amortization of loans | (565,303) | (1,710,935) | (1,806,922) | ||||
Interest paid- Loans | (157,831) | (78,952) | (72,643) | ||||
Payment of lease liability | (1,566,344) | (1,179,723) | (927,903) | ||||
Interest paid on lease liabilities | (1,303,953) | (832,928) | (794,391) | ||||
New 5G license financing | - | 843,020 | - | ||||
Derivative financial instruments | (269,437) | 216,197 | 27,070 | ||||
Purchase of treasury shares, net of disposals | 4,694 | (11,069) | - | ||||
Dividends and interest on shareholders’ equity paid | (1,199,201) | (1,042,976) | (1,153,054) | ||||
Net cash used in financing activities | (3,489,032) | (735,366) | (2,927,843) | ||||
Increase (decrease) in cash and cash equivalents | (2,679,902) | 2,653,325 | 291,243 | ||||
Cash and cash equivalents at the beginning of the financial period | 5,228,615 | 2,575,290 | 2,284,048 | ||||
Cash and cash equivalents at the end of the year | 2,548,713 | 5,228,615 | 2,575,291 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
F-13 |
TIM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, (In thousands of |
1. Operations
1.a The1.1. Corporate structureStructure
TIM S.A. (“TIM” “The Company” and/or “TIM Group”“Company”) is a publicly-held corporationpublic limited company with Registered office in the city of Rio de Janeiro, RJ, and a subsidiary of TIM Brasil Serviços e Participações S.A. (“TIM Brasil”). TIM Brasil is a subsidiary of the Telecom Italia Group andthat held 66.58%66.59% of the share capital of TIM S.AS.A. on December 31, 2020.2022 (66.59% on December 31, 2021).
On December 31, 2019The TIM group (“Group”) comprises TIM, its subsidiary and 2018, TIM S.A. was fully controlled by TIM Participações S.A. with 100% of the capital of the Company (which TIM Brasil also held 66.58% of the capital of TIM Participações), which subsequently, on August 31, 2020, was incorporated by its subsidiary.associated company, Cozani and I-Systems, respectively.
The Company providesholds an authorization for Landline Switched Telephone Service (“STFC”) in Local, National Long-Distance and International Long-Distance modes, as well as Personal Mobile Service (“SMP”) and Multimedia Communication Service (“SCM"SCM”), in all Brazilian states and in the Federal District.
The Company'sCompany’s shares are traded on B3 (formerly BM&F/Bovespa)– Brasil, Bolsa, Balcão (“B3”). Additionally, TIM S.A. has American Depositary Receipts (ADRs), Level II, traded on the New York Stock Exchange (NYSE) – USA. As a result, the company is subject to the rules of the Brazilian Securities and Exchange Commission of Brazil (“CVM”) and the Brazilian Securities and Exchange Commission (“SEC”). In order to comply with good market practices, the company adopts as a principle the simultaneous disclosure of its financial information in both markets, in reais, in Portuguese and English.
InAs of December 2020, TIM’s Board31, 2022, TIM holds a 49% equity interest (49% as of Directors, after analyzingDecember 31, 2021) in the studies prepared and the non-binding proposals received, approved the incorporation ofcompanies I-Systems (associate), formerly FiberCo Soluções de Infraestrutura Ltda.S.A. (“FiberCo”), a wholly-ownedand 100% (it had no interest as of December 31, 2021) in its subsidiary that will be usedCozani RJ Infraestrutura e Rede de Telecomunicações S.A. (“Cozani”). We describe below the processes in future segregation of assets and provision of infrastructure services for residential optical fiber of TIM S.A. (note 40).the corporate reorganization regarding these two companies:
1.2. Corporate Reorganization
1.2.1. Business combination - Cozani
On July 29, 2020,April 14, 2022, TIM, Telefônica Brasil S.A. and Claro S.A. (“Buyers”) delivered to Oi Móvel S.A. – Under court-ordered reorganization (“Seller”, “Assignor” or “Oi Móvel”) the Boardclosing notification regarding the process of Directorsacquisition of the Company approvedSeller’s mobile assets, based on the submission toapprovals by the Extraordinary General MeetingAdministrative Council for Economic Defense (CADE), upon signature of an Agreement on Control of Concentrations, whose decision has already become final and unappealable, and by the proposed Corporate restructure of TIM Participações by TIM S.A.
The Extraordinary General Meeting was held on August 31, 2020, and approved, by a majority of votes, the takeover of TIM Participações by TIM S.A.National Telecommunications Agency (ANATEL), where TIM S.A. became the successor issuer to TIM Participações, in accordanceparticularly with the protocolpublication of Acts 4.949/2022, 4.950/2022 and justification of merger concluded between4.951/2022, in addition to meeting or waived by the administrations ofBuyers, as the Companies on July 29, 2020.
As a result of the merger,case may be, all operations of TIM Participações were transferred to TIM S.A. which was a whole owned subsidiary of Tim Participações, which succeeded it in all its assets, rights and obligations, universally and for all purposes of law. This transaction had no economic or tax impact and the incorporated goodwill from the extinguished company was not and will not be used for the purposes of any tax offsets.
This corporate reorganization aimed to provide greater efficiency and simplification of the organizational structure of the TIM Group, making the structure of internal controls more efficient. In addition, the corporate reorganization provides a better tax efficiency in future distributions of Interest on shareholders’ equity, and also, greater integration of administrative and financial unities allowing a cut-off in operational costs and expenses, as well as improvement of synergies, which shall result in a more efficient operation. As a result from this transaction, there was no impact on the controlling and non-controlling shareholders.
precedent contractual conditions.
F-14 |
TIM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, (In thousands of |
On April 20, 2022, TIM, together with the Buyer companies, after complying with the precedent conditions established by CADE and ANATEL, concluded the acquisition transaction, with TIM, which currently holds 100% of the share capital of Cozani, a company that corresponds to the part of the unit of assets, rights and obligations of Oi Móvel acquired by the Company.
The Company has been complying with all the measures provided for in Anatel’s conditions and in the Concentration Control Agreement (“ACC”) entered into with CADE, mainly, among others:
On April 19, 2022, TIM made the Product Reference Offer available in the wholesale ROAMING market (“ORPA – National Roaming”), which was approved by ANATEL on September 21, 2022. On the same date, it made the Reference Offer for Mobile Virtual Network Operators (“Reference Offer – MVNO”) available, which was approved by ANATEL on September 26, 2022.
On July 4, 2022, TIM independently made public offers for the disposal of up to 50% of Radio Base Stations (“RBDs”) acquired from Oi Móvel (“Public Offerings of RBSs”). It has not been possible to conclude any sales proposal related to the offer so far.
On August 15, 2022, TIM signed an Radiofrequency Availability Agreement with Oi Móvel in order to allow Oi Móvel, to achieve the targets for implementation of fixed wireless access systems set forth in the General Plan of Universalization Targets for the Universalization of the Switched Fixed Telephone Service Provided in the Public Regime (PGMU-IV), approved by Decree 9.619/2018. The purpose of this agreement, as determinated by ANATEL, is to enable the continuity of targets already met, and the fulfillment of non-complied and enforceable targets. This agreement is valid until the end of Oi Móvel’s STFC concession on December 31, 2025, and it registered as the service becomes available.
On July 5, 2022, TIM and Oi Móvel signed a Letter of Intent to guarantee the maintenance and continuity of the mobile services provided at the Comandante Ferraz Antarctic Station (EACF) until the end of the term, on February 21, 2024, of Cooperation Agreement 12.000/2019-001/00, signed on February 21, 2019, by the Federal Government, through the Navy Command, and by Telemar Norte Leste and Oi Móvel. The signing arrangements for the First Amendment to the Cooperation Agreement, which formalizes the result of these negotiations, were concluded on December 9, 2022.
On October 20, 222, TIM published Offers intended to enable the signing of an Industrial Network Exploration Agreement (“Offer – Industrial Network Exploration”) and Temporary and Onerous Assignment of Rights of Use of Radiofrequency (“Offer – Radiofrequency”), under the terms defined by the ACC (Agreement on Control of Concentrations) signed with CADE. The offers were published on TIM’s website and presented to CADE, on the same date, within the period established by ACC (up to 6 months from Closing) and should be available for 36 months. No contracts have been signed so far.
On December 20, 2022, TIM published offers intended to enable the signing of a Contract for the Temporary and Onerous Assignment of Rights of Use of the 900 MHz Radiofrequency, having as its object the radio frequencies acquired from Oi Móvel in said frequency band (“Offer – 900 MHz Radiofrequency”), under the terms defined by ACC signed with CADE. The ACC awaits dispatch order by CADE. The offers were published on TIM’s website and presented to CADE on the same date, within the period established by ACC (up to 8 months from Closing) and should be available for 36 months. No contracts have been signed so far.
The acquisition price of
% of Cozani’s shares, after all the adjustments provided for in the Share Purchase Agreement, was R$ .6 million.Adjusted Closing Price:
F-15 |
TIM S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2022 (In thousands of Reais, except as otherwise stated) |
After
(i) | R$ 634.3 million reais were withheld by TIM, as provided for in the purchase agreement, mainly to meet the possible need for additional price adjustments to be made, which could be identified in the 120 days after the acquisition date. According to the material fact disclosed on September 19, 2022, as a result of the differences found in the assumptions for calculating the: (i) Working Capital and Net Debt, (ii) Capex, and (iii) Net Additions, the amount of R$ 634.3 million, (R$ 670 million updated on December 31, 2022) remained fully retained by the Company until the date of October 4, 2022, when a preliminary decision had been handed down by the 7th Business Court of the Judicial District of Rio de Janeiro determining the deposit in court by the Buyers, with TIM being responsible for depositing the updated amount of R$ 670 million in an account linked to the court-ordered reorganization process of Oi Móvel. Said deposit will remain in an account linked to the Court pending the installation of the Court of Arbitration. For further details, see Note 12; |
(ii) | The amount of R$ 2,057.4 million was transferred directly to BNDES - National Bank for Social and Economic Development, as per the contractual provision; and |
(iii) | The amount of R$ 4,285.9 million was transferred directly to the Assignor on the acquisition date. |
(iv) | The amount of R$ 1.8 million related to termination amounts related to the Seller’s personnel, agreed as part of the amount paid for the acquisition by the Buyers. |
In addition to the Merger,above amounts, the Seller may be entitled to receive up to an additional R$ 230 million from TIM, S.A. became a company listedconditioned to the achievement, of certain targets related to the radio frequencies and customer base involved in the special segmenttransaction. Of this amount, R$ 120 million have already been paid due to the fulfillment of listing Novo Mercadopart of B3 S.A. – Brazil, Bolsa, Balcão (“B3”) and with American Depositary Receipts (“ADRs”) tradedthe established targets. Of the remaining amount not yet paid (R$ 110 million), the Company understands that it is expected to disburse the amount of R$ 77 million up to the described term recognized as contingent consideration on the New York Stock Exchange - New York Stock Exchangedate of disclosure of these consolidated financial statements.
TIM also paid, on April 20, 2022, on behalf of Cozani, the amount of R$ 250.7 million to the Seller, as remuneration, for up to 12 months of service provision in the transition phase, recorded under “Prepaid expenses” and signed an annual contract term for the use of transport infrastructure capacity with Brasil Telecom Comunicação Multimídia S.A., involving the payment of decreasing amounts which, at present value, total approximately R$ 476 million.
As of December 31, 2022, the total consideration transferred for the acquisition of Cozani was R$ 7,211.6 million.
Identifiable assets acquired and liabilities assumed
On December 31, 2022, the fair value of the identifiable assets acquired, and liabilities assumed from Cozani on the date of acquisition by TIM is finalized, according to the purchase price allocation report (“NYSE”Purchase Price Allocation”). StartingOn this date, the analysis indicates assets and liabilities presented below:
F-16 |
TIM S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2022 (In thousands of Reais, except as otherwise stated) |
Schedule of fair value of asset and liabilities acquisition | ||
Fair values recognized on acquisition | ||
Assets | ||
Cash and cash equivalents | 193,382 | |
Trade accounts receivable | 362,379 | |
Prepaid expenses | 165,111 | |
Recoverable taxes | 13,535 | |
Deferred income tax and social contribution | 705,388 | |
Property, plant and equipment (Note 15) | 3,518,477 | |
Intangible assets (Note 16) | 3,599,811 | |
Total Assets | 8,558,083 | |
Liabilities | ||
Suppliers | (183,227) | |
Lease liabilities (Note 17) | (2,929,449) | |
Taxes payable | (157,595) | |
Deferred revenues | (95,135) | |
Other liabilities | (617,518) | |
Total liabilities | (3,982,924) |
Schedule of consideration | |
Total net identifiable assets at fair value | 4,575,159 |
Goodwill on acquisition (Note 16) | 2,636,426 |
Total consideration | 7,211,585 |
The assets acquired and liabilities assumed related to Cozani (“net assets”) by TIM on the acquisition date and the impacts on the Company’s results, which reflect the results of the Company acquired as of April 30, 2022, are summarized below:
Schedule of asset acquired and liabilities | |
Cozani | |
Equity interest of the acquiree | 100% |
Shareholders’ equity of Cozani at book value on April 30, 2022 | 1,282,579 |
Shareholders’ equity of Cozani at fair value on April 30, 2022 | 4,575,159 |
Surplus of radio frequencies (i) | 3,038,951 |
Surplus of customers’ portfolio (ii) | 253,629 |
Contribution to the Group’s net revenue as of the acquisition date | 1,231,518 |
Contribution to the Group with a loss as of the acquisition date | (626,258) |
Net revenue from the acquiree since the beginning of the year | 2,297,351 |
Loss from the acquiree since the beginning of the year | (1,910,638) |
(i) | The intangible asset value refers to the adjustment in the authorizations item reflecting the fair value of the acquired grants and the spectrum assessment was carried out using the market approach, with the application of a transaction multiple. The average useful life is 17.68 years; |
(ii) | The evaluation of the customer portfolio was conducted using the profitability approach, using the MPEEM (Multi-period excess earning method) method based on a calculation of cash flows from future economic benefits attributable to the customer base. The average useful life is 7.67 years. |
F-17 |
TIM S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2022 (In thousands of Reais, except as otherwise stated) |
The goodwill of R$ 2,636,426 comprises the value of future economic benefits arising from synergies expected from the acquisition. Goodwill is allocated on a consolidated basis as the assets acquired and liabilities assumed bring benefits to the business as a whole. There is no expectation that the goodwill recognized will be deductible for tax purposes until the corporate merger of the company Cozani takes place, which should occur throughout 2023.
Other contractual obligations
As a result of certain contractual provisions upon the acquisition of Cozani, TIM withheld the amount equivalent to 10% of the transaction Closing Price. On December 31, 2022, this amount reached R$ 670 million and, due to the preliminary decision of the 7th Corporate Court of the Judicial District of Rio de Janeiro, the amount is in a judicial deposit account until further decision by the Court of Arbitration.
Also, at the time of the acquisition of Cozani, there were certain contractual provisions linked to the fulfillment of migration targets by the Oi Móvel, in the amount of R$ 77 million. The fulfillment of these targets is under the evaluation of the Company’s Management.
On December 31, 2022, both obligations reached the total amount of R$ 748 million.
1.2.2 Sale of 51% of I-Systems (formerly FiberCo) to IHS
In December 2020, FiberCo was established by the Company to segregate network assets and provide infrastructure services. FiberCo was born to implement, operate and maintain last-mile infrastructure for broadband access to be tradedoffered in the wholesale market. Nevertheless, the terms of the agreement define TIM as current main customer, having the prerogative of 6 months of exclusivity after entering new areas.
On May 5, 2021, the Company disclosed the decision of its Board of Directors on the sale by TIM of 51% of the share capital of FiberCo in favor of IHS Fiber Brasil - Cessão de Infraestruturas Ltda. (“IHS”), with the codes TIMS3remaining 49% remaining under the control of the Company upon closing of the transaction.
According to the valuation report of the net assets and liabilities, the calculated amount of R$ 1,211,789 was paid-in as share capital of I-Systems on B3November 1, 2021.
The process for acquisition of equity interest at FiberCo, later named I–Systems, by IHS was completed on November 16, 2021. As a result, IHS currently holds 51% of the share capital of I-Systems, with TIM having a minority (non-controlling) interest of 49% in I-Systems. As of this moment, TIM ceased the line-by-line consolidation of I-Systems (formerly FiberCo).
For the conclusion of the sale, IHS made a capital contribution of R$ TIMB on the NYSE.payment of R$ (secondary) directly to TIM, thus totaling R$ for the acquisition of a 51% equity interest. The fair value calculated for 100% of the new company was R$ .
F-18 |
TIM S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2022 (In thousands of Reais, except as otherwise stated) |
Upon closing, the remaining non-controlling interest of 49% in the investee was recorded by TIM at fair value in the amount of R$ 1,612,957, as provided for by IFRS 10. As provided for in IAS 28, the sale of an investment with loss of control must be recognized by the total write-off of the investment and recognition of part of the associated company’s investment at fair value.
Subsequently, the interest in the investee started to be valued under the equity method, as defined in IAS 28.
Currently, due to the closing of the transaction and loss of I- Systems’s control, TIM wrote-off about 90% of the total goodwill recorded in the acquisition of TIM Fiber SP Ltda. and TIM Fiber RJ S.A. in the amount of R$ 1,051,477.
The effects of the transaction are detailed below:
Schedule of effects transaction | |
Description | |
Transaction price | 1,096,294 |
Record of the remaining interest in the investment at fair value | 1,612,957 |
Cost of assets | |
Write-off of investment | (1,211,472) |
Write-off of goodwill at Fiber RJ/Fiber SP acquisition | (1,051,477) |
Write-off of deferred tax on amortized goodwill | 335,935 |
Gain on transaction | 782,237 |
Income tax and social contribution | (509,245) |
Net gain on transaction | 272,992 |
Gain before income tax and social contribution on remeasurement of investment to fair value | 668,720 |
Gain before income tax and social contribution on asset disposal | 113,517 |
2. ManagementManagement’s statement and basis of preparation and presentation of the consolidated financial statements
The consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (“IFRS”)(IFRS) issued by the International Accounting Standards Board (“IASB”)(IASB), and disclose all (and only) the applicable significant information related to the consolidated financial statements, which is consistent with the information utilizedused by managementManagement in the performance of its duties.
The significant accounting policies applied toin the preparation of thisthese consolidated financial statements are described below and/or presented in theits respective notes. TheseThose policies were consistently applied toin the years presented, unless otherwise indicated.
As previously described with completion of the merger, TIM S.A. became the surviving entity, and the new SEC registrant. Further, since the merger effective date, TIM S.A. shares replaced TIM Participações S.A. shares and are currently listed in the Brazilian Stock Exchange (“B3”) as well as in the New York Stock Exchange (“NYSE”).
Upon the completion of the Corporate restructure, the historical consolidated financial statements of TIM Participações S.A. became the historical consolidated financial statements of TIM S.A. The transaction was recorded at book value since it was a transaction under common control. The consolidated financial statements for the prior periods are presented for TIM Participações S.A. as the predecessor of the Company as the historical operations of TIM Participações S.A. are deemed to be those of the Company.
The comparative figures of the consolidated balance sheet of December 31, 2019, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the two years in the period ended December 31, 2019 are those of TIM Participações.
The number of shares of TIM S.A. prior to the Corporate reorganization was 2,420,447,019, an equivalent number of common shares of the extinguished entity TIM Participações as of the date of the merger. Consequently, basic and diluted earnings per share presented in note 33 were not impacted by the corporate reorganization.
The impact of the reverse merger of TIM Participações by TIM S.A. was limited to reclassifications among certain accounts within the current year statement of changes in shareholders’ equity as follows:presented.
F-19 |
TIM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, (In thousands of |
Equity accounts | The Company’s equity reserves | Impact on TIM S.A. statement of changes in equity | TIM Participações | |||
Capital Stock | 13,477,891 | 3,611,593 | 9,866,298 | |||
Capital reserve | 397,183 | (20,892) | 418,075 | |||
Legal reserve | 1,036,194 | (57,603) | 1,093,797 | |||
Tax benefit reserve | 1,781,560 | - | 1,781,560 | |||
Reserve for expansion | 6,499,602 | (3,535,824) | 10,035,426 | |||
Treasury shares | (4,837) | 5,456 | (10,293) | |||
Accumulated other comprehensive income | (4,848) | (2,730) | (2,118) | |||
Total | 23,182,745 | - | 23,182,745 |
a. | General criteria for preparation and disclosure |
The consolidated financial statements were prepared taking into account the historical cost as the base value as well as financial assets and liabilities (including derivative financial instruments) measured at fair value.
Assets and liabilities are reportedclassified according to their degree of liquidity and collectability. They are reported as current when they are likely to be realized or settled over the next 12 months. Otherwise, they are recorded as non-current. The exception to this procedure involves deferred income tax and social contribution balances (assets and liabilities) and contingent liabilitiesprovision for lawsuits and administrative proceedings that are fully classified as long-term.non-current.
In connection with the preparation of these consolidated financial statements, Company’s Management made analyses and concluded that as there is no evidence of uncertainties about the going concern.
The Company had a profit of R$ 1,670,755 as of December 31, 2022. The Company’s current liabilities exceeded total current assets by R$ 2,229,118, caused by the acquisition of Cozani and payment of obligations related to the 5G license. The Company understands that the aforementioned investments will bring relevant benefits and operational efficiency. On December 31, 2022, the Company’s shareholders’ equity is positive by R$ 25,397,365.
Interests paid are classified as financing cash flow in the statement of cash flows as it represents costs of obtaining financial resources.
b. | Functional |
The presentation currency of theconsolidated financial statements is theare presented in Brazilian Real (R$), which is also the Company´s functional currency.currency of the Company, its associated company and subsidiary.
Transactions in foreignForeign currency transactions are recognized byat the exchange rate on the date of the transaction. Monetary items in foreign currency are convertedtranslated into Brazilian reais at the foreign exchange rate prevailing on the balance sheet date, publishedinformed by the Central Bank of Brazil. Foreign exchange gains and losses linked to these items are recorded in the statement of income.
|
c. | Segment information |
Operating segments are components of the entity that carry out business activities from which revenues can be obtained and expenses incurred. Its operating results are regularly reviewed by the entity's main operations manager, who makes decisions on resource allocation and evaluates segment performance. For athe segment to exist, it must have separateindividualized financial information available.is required.
The main operational decision maker in the Company, responsible for the allocation of resources and periodically evaluating performance, is the Executive Board, which, along with the Board of Directors, are responsible for making the strategic decisions of the company and its management.
The Group's strategy is focused on optimizing results, and from the corporate reorganization mentioned in note 1, all the operating activities of the groupGroup are concentrated exclusively in TIM S.A.and its subsidiary Cozani. Although there are diverse activities, decision makers understand that the company represents only one business segment and do not contemplate specific strategies focused only on one service line. All decisions regarding strategic, financial planning, purchases, investments and investment of resources are made on a consolidated basis. The aim is to maximize the consolidated result obtained by operating the SMP, STFC and SCM licenses.
F-20 |
TIM S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2022 (In thousands of Reais, except as otherwise stated) |
d. | Consolidation procedures |
Subsidiaries are all the entities in which the Group retains control. The Group controls an entity when it is exposed to, or has a right over the variable returns arising from its involvement with the entity and has the ability to interfere in those returns due to its power over the entity. The subsidiaries are fully consolidated as of the date control is transferred to the Group. Consolidation is interrupted beginning as of the date in which the Group no longer holds control.
If the Group loses control exercised over a subsidiary, the corresponding assets (including any goodwill) and liabilities of the subsidiary are written-off at their book values on the date the control is lost, and the write-off of the book value of any non-controlling interests on the date when control is lost (including any components of other comprehensive income attributed to them) also occurs. Any resulting difference as a gain or loss is recorded in income (loss). Any retained investment is recognized at its fair value on the date control is lost.
Intercompany transactions, as well as the balances and unrealized gains and losses in those transactions, are eliminated. The base date of the financial information used for consolidation purposes is the same for all the companies in the Group.
As of December 31, 2020, the Company only had one subsidiary named I-Systems (formerly FiberCo). The consolidated financial statements as of December 31, 2021 is not being presented since I-Systems had been sold before December 31, 2021, as described in Note 1. The Company had 51% of its equity interest on the investee sold to IHS, and TIM S.A. now holds a non-controlling minority interest of 49%. At that moment, TIM S.A. started having I-Systems as an affiliated company and to record the income (loss) of this company under the equity method, no longer consolidating it. That said, the balances of December 31, 2021 are not comparable to the same of December 31, 2020.
The Company’s consolidation base on December 31, 2022, includes the wholly owned subsidiary Cozani, as of April 30, 2022, headquartered in Rio de Janeiro, Brazil and which is mainly engaged in the provision of telecommunications services. The company holds 100% interest, due to the acquisition of this company, as described in Note 1.
e. | Business combination and goodwill |
Business combinations are accounted for under the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, which is measured at acquisition date fair value, and the amount of any non-controlling interests in the acquiree. For each business combination, the Group elects whether to measure the non-controlling interests in the acquiree at the fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition-related costs are expensed as incurred.
The purchase accounting method is used to record the acquisition of subsidiaries by the Group. The acquisition cost is measured as the fair value of the assets acquired, equity instruments (i.e..(i.e.: shares) and liabilities incurred or assumed by the acquirer on the date of the change of control. Identifiable assets acquired, contingencies and liabilities assumed in a business combination are initially measured at fair value on the date of acquisition, regardless of the proportion of any minority interest.non-controlling interests. The portion exceeding the acquisition costconsideration transferred of the Group'sCompany's interest in the acquired identifiable net assets, is recorded as goodwill. Should the acquisition costconsideration transferred be less than the fair value of the net assets of the acquired subsidiary, the difference is recognized directly in the statement of income as a revenue once concepts and calculations applied are reviewed.
Intercompany transactions, as well as the balances and unrealized gains and losses in those transactions, are eliminated. The accounting policies of the subsidiary were adjusted to ensure consistency with the accounting policies adopted by TIM S.A. The base date of the financial information used for consolidation purposes is the same for all the companies in the Group.
These financial statements were approved by the Board of Directors of the Company on April 29, 2021.
The Company applied for the first-time certain standards and amendments, which are effective for annual periods beginning on or after January 1, 2020. The Company has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective
F-21 |
TIM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, (In thousands of |
When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with contractual terms, economic circumstances and pertinent conditions on the acquisition date. This includes separation of embedded derivatives in host contracts by the acquiree.
Any contingent consideration to be transferred by the acquirer will be recognized at fair value on the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability that is a financial instrument is recognized in the statement of income in accordance with IFRS 9 Financial Instruments.
Goodwill is initially measured at cost (being the excess of the consideration transferred in relation to net assets acquired (identifiable assets acquired and liabilities assumed). If the fair value of net assets acquired is in excess of the aggregate consideration transferred, the Group re-assesses whether it has correctly identified all of the assets acquired and all of the liabilities assumed and reviews the procedures used to measure the amounts to be recognized at the acquisition date. If the reassessment still results in an excess of the fair value of net assets acquired over the aggregate consideration transferred, then the gain in a bargain purchase is recognized in the statement of income on the acquisition date.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each cash-generating units of the Group that are expected to benefit from the synergies of combination, regardless of whether other assets or liabilities of the acquiree are assigned to those units.
Where goodwill has been allocated to a cash generating unit and part of the operation within that unit is disposed of, the goodwill associated with the disposed operation is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed under these circumstances is measured based on the relative values of the disposed operation and the portion of the cash generating unit retained.
The amendments to IFRS 3 clarify that, to be consideredGroup measures the lease liabilities assumed at the present value of the remaining payments as if the lease agreement acquired were a business,new lease agreement on the acquisition date. Right-of-use assets were measured at an integrated set of activities and assets must include, at least, an inflow of funds and a substantive process that together contribute significantlyamount equivalent to the capacitylease liabilities and adjusted to generatereflect the outflowfavorable or unfavorable terms of funds. Moreover, it clarifiedthese leases compared to market terms. Considering that a business can exist without including all the inflowsoff-market nature of funds and processes necessary to create outflows of funds. These amendments had no impact onsaid lease is reflected in the Company’s consolidated financial statements, but may impact future periods ifright-of-use asset, the Group enters into any business combination.does not recognize separately an intangible asset or liability relating to favorable or unfavorable terms in relation to market value.
The amendments to Pronouncements IAS 39 and IFRS 9 provide exemptions that apply to all hedge relationships directly affected by the benchmark interest rate reform. A hedge relationship is directly affected if the reform raises uncertainties about the period or the value of cash flows based on the benchmark interest rate of the hedged item or hedging instrument. These changes have no impact on the Company’s individual and consolidated financial statements as it does not have interest rate hedging relationships.
The amendments provide a new definition of material, stating that: “information is material if its omission, distortion or obfuscation can reasonably influence decisions that the main users of the general purpose quarterly information make based on this quarterly information, which provide financial information on entity’s specific report”. The amendments clarify that the materiality will depend on the nature or magnitude of the information, individually or combined with other information, in the context of the financial statements. A distorted information is material if it could reasonably be expected to influence decisions made by primary users. These amendments had no impact on the individual and consolidated financial statements, nor is it expected that there will be any future impact for the Company.
The amendments provide for the granting of benefits to lessees upon adoption of the guidelines of IFRS 16 on the modification of the lease agreement, when accounting for the related benefits as a direct consequence of the Covid-19 pandemic.
As a practical expedient, a lessee may choose not to assess whether a benefit related to Covid-19 grantedwere approved by the lessor is a modification of the lease agreement. The lessee who makes this option must accountboard for any change in the lease payment resulting from the benefit granted in the lease agreement related to Covid-19 in the same way that it would account for the change by adopting IFRS 16 if the change was not a modification of the lease agreement. This amendment had no material impactfilling on the consolidated financial statements of the Company.April 28, 2023.
In May 2017,The following new standards/amendments were issued by the IASB issued IFRS 17 - Insurance Contracts, a new comprehensive accounting standardInternational Accounting Standards Board (IASB), are effective for insurance contracts that includes recognition and measurement, presentation and disclosure. As soon as it comes into force, IFRS 17 will replace IFRS 4 - Insurance Contracts, issued in 2005. IFRS 17 applies to all types of insurance contracts (such as life, non-life, direct insurance and reinsurance), regardless of the type of entity that issues them, as well as certain guarantees and financial instruments with discretionary participation characteristics. Some scope exceptions apply. The overall objective of IFRS 17 is to provide an accounting model for insurance contracts that is more useful and consistent for insurers. In contrast to the requirements of IFRS 4, which are largely based on local accounting policies in force in previous periods, IFRS 17 provides for a comprehensive model for insurance contracts, covering all relevant accounting aspects. The focus of IFRS 17 is the general model, covering the following:year ended December 31, 2022.
F-22 |
TIM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, (In thousands of |
• A specific adaptation for contracts with direct participation characteristics (variable rate approach).
• A simplified approach (premium allocation approach), mainly
IFRS 1 First-time Adoption of International Financial Reporting Standards - Subsidiary as first-time adopter
The amendment allows a subsidiary that chooses to apply paragraph D16(a) of IFRS 1- First-time Adoption of International Accounting Standards to measure cumulative translation differences using the amounts reported in the consolidated financial statements of the parent company, based on the parent company’s transition date to IFRS, if no adjustments have been made for short-term contracts.consolidation procedures and for the effects of the business combination in which the parent company acquired the subsidiary. This amendment also applies to an associate or joint venture that elects to apply paragraph D16(a) of IFRS 171.
These changes had no impact on the Group’s consolidated financial statements as it is effectivenot a first-time adopter.
IFRS 9 Financial Instruments - Rates in the ’10 percent’ test for periods beginningwriting-off financial liabilities
The amendment clarifies the rates that an entity includes when assessing whether the terms of a new or modified financial liability are materially different from the terms of the original financial liability. These rates include only rates paid or received between the borrower and the lender, including rates paid or received by the borrower or the lender on behalf of the other.
In accordance with the interim provisions, the Group applies the amendment to financial liabilities that are modified or exchanged on or after January 1, 2023, requiring the presentationbeginning of comparative amounts. Early adoption is allowed ifthe annual reporting period in which the entity also adopts IFRS 9 and IFRS 15first applies the amendment (the date of first-time adoption). These changes had no impact on the same date or beforeGroup’s consolidated financial statements, as there were no changes to the first-time adoption of IFRS 17.Group’s financial instruments during the period.
This standard doesThe following new standards were issued by the International Accounting Standards Board (IASB), but are not apply toin effect for the Companyperiod ended on December 31, 2022.
· | Amendments to IAS 1: Classification of |
In January 2020, the IASB issued amendments to paragraphs 69 to 76 of IAS 1, aiming to specify the requirements for classifying the liabilities as current or non-current. The amendments clarify the following:
• | What a right to postpone settlement means; |
• What a right to postpone settlement means;
• | That the right to postpone settlement must exist on the base date of the report; |
• That the right to postpone settlement must exist on the base date of the report;
• | That this classification is not affected by the likelihood that an entity will exercise its right to postpone settlement |
• That this classification is not affected by the likelihood that an entity will exercise its right to postpone settlement;
• | That the terms of a liability would not affect its classification only if a derivative embedded in a convertible liability was an equity instrument |
• That only if a derivative embedded in a convertible liability is itself an equity instrument would the terms of a liability not affect its classification.
F-23 |
TIM S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2022 (In thousands of Reais, except as otherwise stated) |
Amendments are valid for periods started on January 1, 2023 and must be applied on a retrospective basis.
The CompanyGroup currently assesses the impact that the changes will have on current practice and whether existing loan agreements may require renegotiation.
· | Amendments to IAS 8: Definition of Accounting Estimates |
(equivalent to revision 20 of the Accounting Pronouncements Committee)
In February 2021, IASB issued amendments to IAS 8, in which the definition of ‘accounting estimates’ is introduced. The amendments clarify the difference between changes in accounting estimates and changes in accounting policies and errors. Additionally, they clarify how entities use measurement and input techniques to develop accounting estimates.
The amendments will become effective for periods beginning on or after January 1, 2023 and will be applied to changes in accounting policies and estimates that occur on or after the beginning of that period. If disclosed, early adoption is allowed.
Amendments are not expected to have a significant impact on the Group’s financial statements.
· | Amendments to IAS 1 and IFRS Practice Statement 2: Disclosure of Accounting Policies (equivalent to revision 20 of the Accounting Pronouncements Committee) |
In February 2021, IASB issued amendments to IAS 1) and IFRS Practice Statement 2 Making Materiality Judgments, in which guides and examples are provided to help entities to apply materiality judgment to the disclosure of accounting policies. The aim of amendments is to assist entities in the disclosure of accounting policies that are most useful by replacing the requirement for disclosure of significant accounting policies to material accounting policies and adding guides about how entities should apply the concept of materiality to make decisions about the disclosure of accounting policies.
The amendments to IAS 1 are applicable for periods started as of or after January 1, 2023, with early adoption allowed. Since the amendments to Practice Statement 2 provide non-mandatory guides about the application of material definition to the accounting policy information, an adoption date is not required for this amendment.
F-24 |
TIM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, (In thousands of |
Impact of COVID-19The Group is currently revisiting the accounting policy disclosures to confirm that they are consistent with the required changes.
· | Amendments to IAS 12: Deferred Tax Related to Assets and Liabilities Arising from a Single Transaction (equivalent to the Committee’s revision 20 of accounting pronouncements) |
In December 2019, an outbreakMay 2021, the Board released amendments to IAS 12, which narrow the scope of the initial recognition exception under IAS 12 so that it no longer applies to transactions that give rise to equal taxable and deductible temporary differences.
The amendments shall apply to transactions occurring in annual periods beginning on or after the earliest comparative period presented. Furthermore, at the beginning of the earliest comparative period presented, a contagious disease, Coronavirus 2019 (COVID-19), began in mainland China,deferred tax asset (provided there is sufficient taxable profit available) and since earlya deferred tax liability must also be recognized for all deductible and taxable temporary differences associated with leases and decommissioning obligations.
The Group is currently assessing the impact of these changes.
COVID-19 impacts
Since March 2020 a pandemic was declared by the virus has spread to Europe, the United States and several other countries, including Brazil. The World Health Organization (WHO) has declareddue to the outbreak of the new Coronavirus (COVID-19) as a pandemic on March 11,. The main impacts and first cases were recorded in Brazil and in the world also in the first quarter of 2020.
The COVID-19 outbreak developed rapidly in 2020 and measures taken to contain the virus affected economic activity, which in turn had implications for the Company’s operating results and cash flows. The lockdown was declared in several States in Brazil in March 2020.
Since then, the Company’s management has been monitoring the impacts and any material uncertainties related to events or conditions that may cast significant doubt on the entity’s ability to continue as an ongoing company. However, in 2020, the Company has a robust infrastructure and is part of an extremely important segment in this period of crisis, essential for the population, government and health system.system since 2020. After an internal analysis, there was no indication of impairment of assets or risks associated with the fulfilmentfulfillment of obligations, since the Company is not highly leveraged and still has credit lines available to be used in the event of a significant reduction in cash volumes.
The Company is monitoring the evolution of the situation and closely assessing the impact of COVID-19 on its business.volume.
In 2020September 2021, the country showed a significant evolution in vaccination levels, with a reduction in the transmission rate and so far, we have not suffered any material impact on our operations.number of cases. Thus, there was a slight improvement in economic activities. In June, 2020,the stores resumed theirreturned with activities with a positive impact on handset sales and thedevice sales.
Currently, we have not identified material impacts on our businesses or our financial targets due to the pandemic were not material. However, we are still continuously monitoring government responses and economic performance and we believe that a prolonged slowdown in local, regional or global economic conditions may affect the Company’s businesses.consolidated financial statements.
3. Critical estimatesEstimates and judgmentsareas where judgment is significant in applying the Company’sapplication of the Company's accounting policies
Accounting estimates and judgments are continuously assessed. They are based on the Company's historical experience and on other factors, such as expectations of future events, considering the circumstances present inon the base date of theconsolidated financial statements.
F-25 |
TIM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, (In thousands of |
By definition, the resulting accounting estimates are seldom equal towill rarely be the respectivesame as the actual incomes.results. The estimates and assumptions that present a significant risk, with the probability of causing a material adjustment to the book values of assets and liabilities for the fiscal period, are covered below.
(a) Impairment loss on non-financial assets and investments in subsidiary and associated company.
Impairment losses occur when book value of an asset or cash generating unit exceeds its recoverable value, which is the highest of fair value less selling costs and value in use. The calculationCalculation of fair value less selling costs is based on information available on similar assets’ selling transactions or market prices less additional costs to dispose of the asset. The calculation of value in use is based on the discounted cash flow model.
Any reorganization activities with which the Company is not committed to on the reporting date of the Presentation of consolidated financial statements or significant future investments that could improve the asset base of the cash generating unit under test are excluded for impairment testing purposes.
The main non-financial assets for which this assessment was made are goodwill recorded by the Company (note 14)(Note 16) and its tangible and intangible assets.
Net investments in the subsidiary and associated company are valued after applying the equity method to determine whether there is any objective evidence of impairment. The recoverable amount of an investment in an associated company must be determined for each investment, unless the associated company does not generate cash inflows on an ongoing basis that are largely independent of those generated by the entity’s other assets. The investment in an associated company was valued as described in Note 14.
(b) (Current and deferred) incomeIncome tax and social contribution (current and deferred)
Income tax and social contribution (current and deferred) are calculated according to interpretations of current legislation and IAS 12. This process typically involves complex estimates to determine taxable income and temporary differences. In particular, the deferred assets on tax losses, negative basis of social contribution and temporary differences areis recognized in proportion to extent that it is probablethe probability that future taxable income is available and can be used. The measurement of the recoverability of deferred income tax on tax losses, negative basis of social contribution and temporary differences takes the history of taxable income into account, as well as the estimate of future taxable income (note(Note 10).
(c) Provision for legal and administrative proceedings
The legal and administrative proceedings are analyzed by the Management along with its legal advisors (internal and external). The Company considers factors in its analysis such as hierarchy of laws, precedents available, recent court judgments, their relevance in the legal system and payment history. These assessments involve Management’s judgment (note 23)(Note 25).
(d) Fair value of derivatives and other financial instruments
The financial instruments presented in the balance sheet at fair value are measured using valuation techniques that consider observable data or observable data derived from market (note 36)(Note 39).
F-26 |
TIM S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2022 (In thousands of Reais, except as otherwise stated) |
(e) Unbilled revenues
Since some cut dates for billing occur at intermediate dates within the months of the year, as the end of each month there are revenues earned by the Company, but not actually invoiced to its customers. These unbilled revenues are recorded based on estimate that takes into consideration historical consumption data, number of days elapsed since the last billing date, among others (note 26)(Note 29).
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(f) Leases
The new standard establishes the principles for the recognition, measurement, reporting and disclosure of leases, and requires the recognition by lessees of assets and liabilities arising from lease agreements, except for short-term contracts, that is, with a term of 12 months or less, or contracts in which the value of the underlying assets is low. The Company decided to adopt IFRS16 retrospectively, while the cumulative effect of the initial application is recognized on the date of initial application, that is, January 1, 2019 in total amount of R$5.256.114. Additionally, the Company decided to take practical steps in its initial adoption of the standard, such as: (i) non-revaluation of financial lease agreements previously recognized according to IAS 17 upon initial measurement of financial lease liabilities, according to the new accounting pronouncement, and IFRIC 4; (ii) exclusion of lease agreements expiring in the next 12 months and unlikely to be renewed by the Company and the exclusion of leasing contracts considered of low value; (iii) non-application of this new standard to agreements not previously identified as leases, using IAS 17 and IFRIC 4; and (iv) application of a single discount rate to the leasing portfolio with reasonably similar characteristics (such as leasing with a similar remaining leasing period for a similar class of underlying assets in a similar economic setting).
The Company has a significant number of the lease contracts in which it acts a lessee (Note 17), and with the adoption of the accounting standard IFRS 16 – Leases, on January 1, 2019, certain judgments were exercised by Company´sCompany’s management in measuring lease liabilities and right-of-use assets, such as: (i) estimate of the lease term, considering non-cancellable period and the period covered by options to extend the contract term, when the exercise depends only from the Company, and this exercise is reasonably certain; and (ii) using certain assumptions to calculate the discount rate.
The Companycompany is not able to readily determine the interest rate implicit on the lease and, therefore, considers its incremental rate on loans to measure lease liabilities. Incremental rate on the lessee´s borrowinglessee’s loan is the interest rate that the lessee would have to pay when borrowing, for a similar term and with a similar guarantee, the resources necessary to obtain the asset with a value similar to the right of use asset in a similar economic environment. Thus, this assessment of lease, considering non-cancellable period and the period covered by options to extend the contract term. The Companycompany estimates the incremental rate using observable data (such as market interest rates) when available and considers aspects that are specific to the Company (such as the cost of debt) in this estimate.
(g)Fair value of the intangible assets Intangible assets are measured at historical cost less accumulated amortization and impairment losses. The cost of intangible assets acquired in a business combination corresponds to their fair value at acquisition date. After the initial recognition, the intangible assets are measured at cost, less accumulated amortization and impairment losses. (h)Business combination Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, which is measured at acquisition date fair value, and the amount of any non-controlling interests in the acquiree. For each business combination, the Group elects whether to measure the non-controlling interests in the acquiree at the fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition-related costs are expensed as incurred. For further information, see Notes 1.2.1 and 2.e. 4. Cash and cash equivalents
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They are financial assets measured at amortized cost using the effective interest rate method.
The Company’s Management classifiesdetermines the classification of its financial assets upon initial recognition.
2020 | 2019 | |||
Cash and banks | 100,008 | 101,928 | ||
Unrestrictedly available financial investments: | ||||
Bank Deposit Certificates (CDB)/Repurchase and resale agreements | 2,475,282 | 2,182,882 | ||
2,575,290 | 2,284,810 |
F-27 |
TIM S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2022 (In thousands of Reais, except as otherwise stated) |
Schedule of financial assets | ||||
2022 | 2021 | |||
Cash and banks | 59,959 | 99,821 | ||
Unrestrictedly available financial investments cash and cash equivalents: | ||||
CDB’s / Repurchases | 2,488,754 | 5,128,794 | ||
Total cash and cash equivalents | 2,548,713 | 5,228,615 |
Bank certificates of deposit (“CDBs”) and committed transactions are nominative securities issued by banks and sold to the public as a form of fund raising. Such securities may be traded during the contracted term, at any time, without significant loss in their value and are used for the fulfilment of short-term obligations by the company.
The decrease in the cash position is explained by the acquisition of Cozani (Note 1.2.1). and payments for 5G licenses and related obligations (Notes 16.f and 20).
The annual average return of the Company's investments related to CBD'sCDB’s and Repurchases and Resale AgreementsCommitted Operations is 101.24% (99.95% on100.12% (101.57% as of December 31, 2019)2021) of the variation of the Interbank Deposit Certificate – CDI.
5. Marketable securities
Comprise financial assets measured at fair value through profit or loss.
Schedule of marketable securities | ||||||
2022 | 2021 | 2022 | ||||
FUNCINE (i) | 12,929 | 11,508 | 12,929 | |||
Fundo Soberano (ii) | 179 | 9,624 | 179 | |||
FIC: (iii) | ||||||
Government bonds (a) | 1,323,409 | 2,975,613 | 1,323,409 | |||
CDB (b) | 20,371 | 40,496 | 20,371 | |||
Financial bills (c) | 398,879 | 703,118 | 398,879 | |||
Other (d) | 447,797 | 839,169 | 447,797 | |||
2,203,564 | 4,579,528 | 2,203,564 | ||||
Current portion | (2,190,635) | (4,568,020) | (2,190,635) | |||
Non-current portion | 12,929 | 11,508 | 12,929 |
The decrease in the marketable securities’ position is explained by the acquisition of Cozani (Note 1.2.1). and payments for 5G licenses and related obligations (Notes 16.f and 20).
2020 | 2019 | |||
FUNCINE (1) | 7,061 | 3,849 | ||
Fundo Soberano (2) | 5,220 | 7,329 | ||
FIC: (3) | ||||
Government bonds (3) | 1,345,797 | 179,390 | ||
CDB (4) | 17,370 | 216,196 | ||
Financial bills (5) | 292,500 | 105,857 | ||
Other (6) | 409,551 | 145,707 | ||
2,077,499 | 658,328 | |||
Current portion | (2,070,438) | (654,479) | ||
Non-current portion | 7,061 | 3,849 | ||
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(1) On December 2017, the Company, with the aim of using tax deductibility benefit for income tax and social contribution purposes, started investing in the National Film Industry Financing Fund (FUNCINE). The average remuneration in 2020 is negative by 0.34% (9.18% on December 31, 2019). The position on December 31, 2020 in the amount of R$ 7,061 (R$ 3,849 million in 2019).
(ii) | Fundo Soberano is composed only of federal government bonds. The average remuneration in 2022 was 99.94% p.a. of the variation of the Interbank Deposit Certificate - CDI (95.13% on December 31, 2021). |
(2) “Fundo Soberano” is composed only of federal government bonds. The average remuneration in 2020 is 87.71% (97.62% on December 31, 2019) of the variation of the Interbank Deposit Certificate (CDI).
(3) In August 2017, the Company invested in open FIC's (Quota Investment Fund). Funds are mostly made up of government bonds and papers from top-tier financial institutions. The average remuneration in 2020 of Investment Fund in Quotas was 112.72% (99.67 on December 31, 2019) of the variation of the Interbank Deposit Certificate (CDI).
(iii) | In August 2017, the Company invested in open FIC's (Quota Investment Fund). Funds are mostly made up of federal government bonds and papers from financial institutions, mostly AAA (highest quality). The average remuneration of FICs in 2022 was 107.19% p.a. of the variation of the Interbank Deposit Certificate - CDI (122.76% p.a. on December 31, 2021). |
F-28 |
TIM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, (In thousands of |
Government bonds are fixed income financial instruments issued by the National Treasury to finance the activities of the Federal Government.
(4) The CDB operations are issued by the banks with the commitment of stock buyback by the bank itself and with predetermined taxes.
(a) | Government bonds are fixed income financial instruments issued by the National Treasury to finance the activities of the Federal Government. |
(5) The Financial bills is a fix income tittle emitted by financial institutions with the objective of a long-term fund raising.
(6) Is represented by: Debentures, FIDC, commercial notes, promissory notes, bank credit note.
(c) | The Financial bills is a fix income tittle emitted by financial institutions with the objective of a long-term fund raising. |
(d) | Is represented by: Debentures, FIDC, commercial notes, promissory notes, bank credit note. |
6. Trade accounts receivable
These are financial assets measured at amortized cost, and refer to accounts receivable from users of telecommunications services, from network use (interconnection) and from sales of handsets and accessories. Accounts receivable are recorded at the price charged at the time of the transaction. The balances of accounts receivable also include services provided and not billed (“unbilled”) up to the balance sheet date. Trade accounts receivable are initially recognized at fair value and, subsequently, measured at amortized cost using the effective interest rate method less provision for expected credit losses (“impairment”).
The provision for expected credit losses was recognized as a reduction in accounts receivable based on the profile of the subscriber portfolio, the aging of overdue accounts receivable, the economic situation, the risks involved in each case and the collection curve, at an amount deemed sufficient by Management, as adjusted to reflect current and prospective information on macroeconomic factors that affect the customers’ ability to settle the receivables.
The fair value of trade accounts receivable is close to the book value recorded on December 31, 20202022 and 2019.December 31, 2021.
The average rate considered in calculating the present value of accounts receivable recorded in the long term is 0.22% (0.07% in 2019)0.58% p.m. (0.19% p.m. on December 31, 2021).
Schedule of trade account receivables | ||||||
2020 | 2019 | 2022 | 2021 | |||
Trade accounts receivable | 3,180,661 | 3,287,855 | 3,659,777 | 3,253,207 | ||
Accounts receivable, gross | 3,831,921 | 4,061,932 | ||||
Gross accounts receivable | 4,241,515 | 4,000,026 | ||||
Billed services | 2,039,403 | 2,076,569 | 2,149,579 | 2,107,682 | ||
Unbilled services | 817,669 | 858,418 | 929,669 | 849,762 | ||
Network usage | 399,083 | 438,168 | ||||
Sale of goods | 552,962 | 670,573 | ||||
Network use (i) | 550,416 | 504,333 | ||||
Goods sold | 590,476 | 521,362 | ||||
Contractual assets (Note 24) | 19,828 | 15,340 | ||||
Other accounts receivable | 1,547 | 1,547 | ||||
Provision for expected credit losses | (581,738) | (746,819) | ||||
Current portion | (3,421,094) | (3,066,906) | ||||
Non-current portion | 238,683 | 186,301 |
F-29 |
TIM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, (In thousands of |
Contractual assets (note 22) | 14,914 | 15,142 | |
Other accounts receivable | 7,890 | 3,062 | |
Provision for expected credit losses | (651,260) | (774,077) | |
Current portion | (3,051,834) | (3,184,780) | |
Non-current portion | 128,827 | 103,075 |
The movement of the provision for loss on expected settlement credits,credit losses, accounted for as an asset reduction account, was as follows:
Schedule of changes in the allowance for doubtful accounts | |||
2022 | 2021 | ||
Opening balance | 746,819 | 651,260 | |
Supplement to expected losses, net of reversal | 626,218 | 544,642 | |
Company acquisition balance | 33,284 | - | |
Write-off of provision | (824,583) | (449,083) | |
Closing Balance | 581,738 | 746,819 |
2020 | 2019 | ||
Opening balance | 774,077 | 686,928 | |
Set-up of provision (note 27) | 552,817 | 748,291 | |
Write-off | (675,634) | (661,142) | |
Closing Balance | 651,260 | 774,077 |
In 2022, the change in the closing balance of the provision for expected credit losses occurred due to the supplement to expected losses, net of reversal and write-off of already accrued invoices.
The aging of accounts receivable is as follows:
2020 | 2019 | ||
Total | 3,831,921 | 4,061,932 | |
Falling due | 2,785,469 | 2,576,307 | |
Overdue (days): | |||
Up to 30 | 248,955 | 328,457 | |
Up to 60 | 84,218 | 146,200 | |
Up to 90 | 71,635 | 149,852 | |
>90 | 641,644 | 861,116 |
Schedule of aging of accounts receivable | |||
2022 | 2021 | ||
Total | 4,241,515 | 4,000,026 | |
Undue | 3,221,416 | 2,895,999 | |
Overdue up to (days): | |||
30 | 286,324 | 246,195 | |
60 | 82,533 | 100,027 | |
90 | 73,581 | 77,280 | |
>90 | 577,661 | 680,525 |
7. Inventories
Inventories are presented at the average acquisition cost. A loss is recognized to adjust the cost of Handsets and accessories to the net realizable value (selling price), when this value is less than the average acquisition cost.
2020 | 2019 | ||
Total Inventories | 246,602 | 203,278 | |
Inventories | 257,477 | 214,889 |
F-30 |
TIM S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, (In thousands of |
Cell phones and tablets | 186,961 | 146,295 | ||||
Schedule of inventory | ||||||
2022 | 2021 | |||||
Total Inventories | 236,117 | 202,553 | ||||
Inventories | 248,768 | 214,605 | ||||
Mobile handsets and tablets | 138,951 | 140,934 | ||||
Accessories and prepaid cards | 55,558 | 61,436 | 78,330 | 53,791 | ||
TIM chips | 14,958 | 7,158 | 31,487 | 19,880 | ||
Losses on adjustment to realizable value | (10,875) | (11,611) | ||||
Losses on adjustment to realizable amount | (12,651) | (12,052) |
8. Recoverable indirect taxes, charges and contributions
(b) ICMS amounts paid under the tax substitution regime from goods acquired for resale, mainly mobile handsets, chips, tablets and modems sold by TIM.
In March 2017, the Federal Supreme Court (“STF”) recognized the unconstitutionality of including ICMS amounts in the calculation base of PIS and COFINS contributions. TIM S.A. (previously named “Intelig Telecomunicações Ltda.”), as the surviving company from the merger of TIM Celular S.A. and other entities existing in the Group in the past, which had filed proceedings of the same nature, has been challenging this issue in court since 2006, with effects retroactive to five years, as permitted by the legislation.
The amount recorded are updated monthly at the interest rate equivalent to the reference rate of the Special Settlement and Custody System (Selic), available on the website of the Brazilian Federal Revenue. In May 2021, the Brazilian Supreme Court (STF) ended the discussion regarding the credit rights of the companies, defining in the judgment of Motions for Clarification that the exclusion of ICMS from the PIS and COFINS calculation basis is valid as of March 15, 2017, when the general repercussion thesis (Topic 69) was established, in the judgment of Special Appeal (RE) No. 574706. Considering that the judges ratified that the ICMS not included in the PIS/COFINS calculation basis is highlighted in the invoice, we confirm that the procedures adopted by TIM S.A., when providing for PIS/COFINS credits, are adequate. In
Deferred income tax and social contribution are recognized
Deferred tax assets on income tax and social contribution are recognized only in the event of a profitable track record and/or when the annual forecasts prepared by the
The balances of deferred income tax and social contribution assets and liabilities are
On December 31, 2022, and 2021, the prevailing tax rates were 25% for income tax and 9% for social contribution. In addition, there is no statute of limitation regarding the income tax and social contribution carried forward losses, which it can be offset by up to 30% of the taxable profit reached at each fiscal year, according to the current tax legislation.
The amounts recorded are as follows:
Expectation of
The estimates of recoverability of tax credits were calculated taking into consideration financial and business assumptions available
Based on these projections, the
The company based on a history of profitability and based on projections of future taxable results, constitutes deferred income tax credits and social contribution on all of its tax losses, negative social contribution basis and temporary differences.
Considering that Cozani does not have a history of taxable profit, deferred tax assets on tax losses and negative basis of social contribution in the amount of R$ 129,954 referring to Cozani were not recognized. The Company used credits from tax losses and the negative basis of social contribution in the amount of R$
11. Prepaid expenses
They are recorded at historical cost and updated according to current legislation.
Civil
These are court deposits to guarantee the execution of civil proceedings where the Company is challenging the amounts involved. Most of these proceedings refer to lawsuits filed by customers, involving issues of consumer rights, among others.
There are some processes with differentiated matters, for instance, in which the value set by ANATEL for vacating certain transmission sub-bands is discussed, enabling the implementation of 4G technology. In this case, the
In a Material Fact released on October 4, 2022, a preliminary decision had been handed down by the 7th Business Court of the Judicial District of Rio de Janeiro determining the deposit in court by the Buyers (TIM, Telefônica Brasil S.A. and Claro S.A.) of approximately R$ 1.53 billion – of which approximately R$ 670 million by TIM – in an account linked to the court-ordered reorganization process of Oi Móvel, where it will be safeguarded until a later decision by the arbitration court. Said deposit will remain in an account linked to the Court pending the installation of the Court of Arbitration. On October 19, 2022, TIM deposited the amount of R$ 670 million in guarantee for the Judgment of the 7th Corporate Court of the Judicial District of Rio de Janeiro. Labor
These are amounts deposited in court as guarantees for the execution and the filing of appropriate appeals, where the relevant matters or amounts involved are still being discussed. The total amount has been allocated between the various claims filed by registered employees and third-party service providers.
Tax
The Company has legal deposits, relating to tax matters, made to support several ongoing legal discussions. Such deposits mainly relate to the following discussions:
13. Other assets
14. Investment The ownership interest in associated company or subsidiary is valued using the equity accounting method. As mentioned in Note 1, in December 2020, the company Fiber Co (current I-Systems) was established and was 100% controlled by TIM S.A. In November 2021, as a result of the spin-off of net assets of the broadband business and the creation of I-Systems (formerly FiberCo) with subsequent sale of 51% of its equity interest on behalf of IHS, TIM S.A. assessed the transaction as a loss of control and stopped consolidating it, recording the investment in an associated company, in the amount of R$ 1,612,957 at fair value for the remaining minority interest (non-controlling) of 49%. TIM S.A. has 49% (49% on December 31, 2021) in the share capital of I-Systems. Therefore, between December 2020 and October 2021, Fiber Co was a subsidiary of TIM S.A., becoming an associated company as of November 2021, a condition that remains until now. The following table represents summarized financial information about the investments of I-Systems:
As of December 31, 2022, TIM S.A. held 49% control over FiberCo (currently I-Systems).
15. Property, plant and equipment
Property, plant and equipment are stated at acquisition and/or construction cost, less accumulated depreciation and impairment losses (the latter only if applicable). Depreciation is calculated
The estimated costs of dismantling towers and equipment on rented properties are capitalized and depreciated over the estimated useful lives of these assets. The Company recognizes the present value of these costs in property, plant and equipment with a counter-entry to the liability “provision for future asset retirement”.
Gains and losses
. R$ 1,218,340 as write-off of property, plant and equipment, which makes up part of the balance of R$ 1,211,789 of net assets that was paid-in as share capital of I-Systems (formerly FiberCo) on November 1, 2021, as described in Note 1. . R$ 179,875 in rights of use in leases due to remeasurement of contracts, including changes in the term and scope of rentals. (ii) The construction in progress
The lease rights of use are represented by leased agreements of identifiable assets within the scope of IFRS16 standard. These rights refer to leases of network infrastructure, stores and kiosks, real estate, land (Network) and fiber, as below:
In 16. Intangible assets
Intangible assets are measured at historical cost less accumulated amortization and impairment losses (if applicable) and reflect: (i) the purchase of authorizations and rights to use radio frequency bands, and (ii) software in use and/or development. Intangible assets also include: (i) infrastructure right-of-use of other companies, and (ii) goodwill on expectation of future profits in purchases of companies.
Amortization charges are calculated using the straight-line method over the estimated useful life of the assets contracted and over the terms of the authorizations. The useful life estimates of intangible assets are reviewed regularly.
Financial charges on funds raised generically (with no specific allocation), used to obtain a qualifying asset, which is an asset that necessarily demands a substantial period of time to become ready for intended use is capitalized as part of this asset’s cost when it is probable that will result in future economic benefits to the
The values of permits for the operation of SMP and rights to use radio frequencies, as well as software, goodwill and others are demonstrated as follows: The cost of intangible assets acquired in a business combination corresponds to their fair value at acquisition date. After the initial recognition, the intangible assets are measured at cost, less accumulated amortization and impairment losses. Intangible assets with undefined useful lives are not amortized but tested for impairment on an annual basis, individually or at cash generating unit level.
(a) Changes in intangible
The intangible assets (i) In
(b) Amortization rates
(c) Software licenses
Directly attributable costs that are capitalized as part of the software product are related to employee costs directly allocated in its development.
(d) Goodwill registered (d.1) Goodwill on the acquisition of Cozani As described in Note 1.2.1, in April 2022 the Company acquired 100% of the voting shares of Cozani, with a total purchase consideration transferred of R$ 7,211,585 and identifiable assets, net of liabilities assumed, at a fair value of R$ 4,575,159. Therefore, having a goodwill arising on acquisition of R$ 2,636,426, which is recorded on December 31, 2022. The Group describes the accounting practice adopted in business combinations in the Note 2(e) that goodwill is initially measured as being the excess of consideration transferred in relation to net assets acquired (acquired identifiable assets and assumed liabilities). After initial recognition, the goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units that are expected to benefit from the combination. The goodwill was allocated to the mobile cash generating unit, which, in the case of the Group, is the only one identified so far. (d.2) Goodwill registered in previous years The Company has the following goodwill based on Goodwill from TIM Fiber SP and TIM Fiber RJ acquisitions
TIM Fiber SP Ltda. and TIM Fiber RJ. S.A. were merged into TIM Celular S.A. on August 29, 2012. TIM Celular S.A. recorded the goodwill allocation related to the purchase of the companies TIM Fiber SP and TIM Fiber RJ, at the end of the purchase price allocation process, in the amount of R$ In November 2021, the Company concluded the drop-down of liquid assets related to the residential broadband business linked to the secondary network infrastructure to the wholly-owned subsidiary FiberCo and sold 51% of the equity interest in FiberCo, currently named I- Systems, on behalf of IHS. Currently, due to the closing of the transaction, TIM S.A. wrote-off about 90% of the total goodwill recorded in the acquisition of TIM Fiber SP Ltda. and TIM Fiber RJ S.A. in the amount of R$ 1,051,477. As a result, IHS currently holds 51% of the share capital of I-Systems, with TIM S.A. having a minority (non-controlling) interest of 49% in I-Systems. Consequently, with the closing of this deal in November 2021, the goodwill initially recorded on the acquisition of the companies Fiber RJ and Fiber SP was reduced to R$ 108,171 and this balance was recorded on December 31, 2022 and 2021. On August 31, 2020, with the merger of TIM Participações S.A. by TIM S.A., the Company recorded the goodwill arising from the merger of the net assets of TIM Participações, which were originated in acquisition transactions as described below:
Goodwill acquisition of "Intelig" by TIM Participações – the goodwill arising from the acquisition of TIM S.A. (formerly ”Intelig") in December 2009 in the amount of R$ 210,015 is represented/based on the expectation of future profitability of the Company. Its recoverability is tested annually, through the impairment testing. Goodwill from the acquisition of minority interests in TIM Sul and TIM Nordeste – TIM Participações S.A. (merged by TIM S.A. in August 2020) acquired in 2005, all the shares of the minority shareholders of TIM Sul and TIM Nordeste, in exchange for shares issued by TIM Participações, converting these companies into full subsidiaries. The goodwill resulting from this transaction amounted to R$ 157,556.
Impairment test
As required by the accounting standard, the Company tests goodwill on business The methodology and assumptions used by Management
The
On December 31,
For the calculation of fair value, the level of hierarchy within which the measurement of the fair value of the asset (cash generating unit) is classified was considered. For the company, as there is only one CGU this was classified in its entirety as Level 1, for the disposal costs we consider that it is irrelevant considering the variation between the fair value level 1 and the book value of the cash generating unit.
The fair value of
On December 31, 2022, the Company carried out the analysis of all tangible, intangible assets and investments and did not identify any impairment indicators. (e) Infrastructure right-of-use - LT Amazonas
The company has signed infrastructure rights agreements with companies that operate electricity transmission lines in the Northern Region of Brazil. These contracts fall within the scope of IFRIC 4
Additionally, the Company has signed network infrastructure sharing agreements with Telefónica Brasil S.A., also in the North Region. In these, the two operators optimize resources and reduce their respective operating (f) Authorizations
In this item are recorded the values related to the acquisition of Lot 2 in the auction of the 700 MHz band in the amount of R$ 1,739 million, in addition to the costs related to the cleaning of the frequency of the 700 MHZ band acquired, which totaled R$1,199 million, in nominal values. As it is a long-term obligation, the amount payable of R$ 1,199 million was reduced by R$ 47 million by applying the concept of adjustment to present value (“AVP”). The aforementioned license 5G License In In November 2021, TIM participated in the
Aiming to fulfill the
On the signature date of the terms, in December 2021, the 2.3GHz and 26GHz radio frequencies were readily available for use by the Company (operating assets), generating the registration in 2021 in “Authorizations” of the amounts related to the licenses (R$ 614 million) and the obligations related to the 26GHz license, which will be fulfilled through EACE (R$ 550 million). The disbursements with EACE (R$ 633 million), provided for in the Public Notice, will occur in 5 semi-annual installments between 2022 and 2024, and are monetarily restated by the IGP-DI. The Company evaluated the application of the concept of adjustment to present value (“AVP”) upon initial recognition (R$ 83 million). The 3.5GHz radio frequency was not readily available, requiring spectrum cleaning activities to be available for use, and, thus, it was registered in assets in progress (R$ 270 million). Therefore, the obligations related to this activity, to be carried out by EAF (R$ 2,104 million) were also recorded under assets in progress. The disbursements with the EAF, as provided for in the Public Notice, were restated by the IGP-DI until the disbursement dates. Such disbursements took place in 2 installments in 2022 (R$ 1,090 million in February and R$ 1,133 million in May) to EAF. Furthermore, as described above, the Company capitalizes loan costs for qualifying assets that require a substantial period of time to be in a condition for use as intended by Management. This concept includes the 3.5GHz radio frequency. On December 31, 2022, the Company recorded R$ 290 million in intangible assets referring to Selic interest (R$ 1 million in 2021) incurred on the 3.5GHz radio frequency, and R$ 99 million related to the inflation adjustment of amounts due to the EAF (R$ 19 million in 2021). Said balances are recorded under assets in progress. Thus, the total effect on the Company’s intangible assets on December 31, 2022 referring to 5G radio frequencies and related obligations was R$ 3,866 million (R$ 3,584 million in 2021), of which R$ 2,753 in assets in progress (R$ 2,394 in 2021) and R$ 1,113 million in Authorizations (R$ 1,190 million in 2021). 17. Leases When entering into a contract, the Company assesses whether the contracts signed are (or contain) a lease. An agreement is (or contains) a lease if it transmits the right to control the use of an identified asset for a period of time in exchange for consideration. Leases whose the Company is a
Leases in which the Company, as a lessor, transfers substantially all the risks and rewards of ownership to the other party (lessee) are classified as finance leases. These lease values are transferred from the intangible assets of the Company and are recognized as a lease receivable at the lower of the fair value of the leased item and/or the present value of the receipts provided for in the agreement. Interest related to the lease is taken to income
Asset leases are financial assets or liabilities classified and/or measured at amortized cost.
Assets
As a result of the contract signed with LT Amazonas, the Company signed network infrastructure sharing agreements with Telefónica Brasil S.A. In these agreements, the company and Telefónica Brasil S.A. share investments made in the Northern Region of Brazil. The company has monthly amounts receivable from Telefónica Brasil S.A. for a period of 20 years, adjusted annually by the IPC-A. The discount rate used to calculate the present value of the installments due is
(ii) Subleases - Stores - IFRS 16 The Company, due to sublease agreements for third parties in some of its stores, recognized the present value of short and long term receivables, which are equal in value and term to the liability cash flows of the contracts called “resale stores”. The impact on lease liabilities is reflected in the group “Leases - Shops & Kiosks and Real Estate”. Liabilities
The amount of interest paid in the year ended December 31, 2022, related to IFRS 16 in the Company was R$ 1,001,311 (R$ 599,296 in the year ended December 31, 2021). In accordance with IFRS 3, in a business combination, lease liabilities must be measured at the present value of the remaining lease balance as if the lease agreement acquired was a new lease agreement on the acquisition date. The impact on Lease Liabilities on the acquisition date is R$ 2,929,449 (Note 1.2.1). The consolidated network infrastructure lease amounts and right of use include, on December 31, 2022, R$ 755 million referring to contract cancellation penalties provided for in the lease agreements. Changes to the lease liabilities are shown in Note 39. The table below value:
The Company executed agreements for the right to use the infrastructure of companies that operate electric power transmission lines in Northern Brazil (“LT Amazonas”). The terms of these agreements are for 20 years, counted from the date on which the assets are ready to operate. The contracts provide for monthly payments to the electric power transmission companies, restated annually at the IPCA.
The discount rate used to calculate the present value of the installments due is
The Company entered into two Sales Agreements with American Tower do Brasil Cessão de Infraestruturas Ltda. (“ATC”) in November 2014 and January 2015 for up to 6,481 telecommunications towers then owned by TIM Celular, for an amount of approximately R$3 billion, and a Master Lease Agreement (“MLA”) for part of the space on these towers for a period of 20 years from the date of transfer of each tower, under a sale and leaseback transaction, with a provision for monthly rental amounts depending on the type of tower (greenfield or rooftop). The sales agreements
In total, 5,873
The discount rates used at the date of the transactions, ranging from
In addition to
The present value, principal and interest value on December 31, Lease agreements within the scope of IFRS 16 acquired through the acquisition of Cozani were remeasured on the acquisition date to reflect the Company’s expectation of the lease term and average incremental borrowing rate. The amount recorded on the acquisition date was R$ 2,929,449.
The lease amounts considered
These refer to Fistel credit amounts arising from the reduction of the
19. Supplier Accounts payable to suppliers are obligations payable for goods or services that were acquired in the usual course of business. They are initially recognized
The company entered into contracts with banks to assist its suppliers who requested drawee risk operations. In such operations, suppliers transfer their credit rights against the Company to the banks, with no right of recourse, aiming to receive them in advance by applying a discount. After carrying out the operations, the Company currently has the banks as creditors of the notes assigned by the suppliers in the original value and term of the assigned credit rights, without any associated financial charge or benefit. Trade notes payable related to these operations remain classified under “suppliers”. As of December 31, 2022, the Company has approximately R$ 260 million (R$ 350 million as of December 31, 2021) related to the drawee risk operation.
On December 31,
On June 30, 2015, the company filed a lawsuit questioning the collection of the excess nominal value of R$ 61 million,
For the amounts related to radio frequencies (R$ 884 million upon initial registration), Selic rate interest is levied, and the Company will make annual payments for a period of 20 years (1st installment paid in December 2021 and 2nd installment paid in December 2022 in the amounts of R$ 46,274 and R$ 52,005, respectively). Regarding amounts related to disbursement obligations with EAF and EACE entities (R$ 2,737 million upon initial registration, of which R$ 2,654 million net of adjustment do present value), there is a monetary restatement by IGP-DI, and disbursements will occur between 2022 and 2024. The contributions to EAF were fully made in 2022 (R$ 1,090 million in February and R$ 1,133 million in May). The first contribution to EACE took place in April 2022, in the amount of R$ 137 million, while the second contribution took place in October 2022, in the amount of R$ 134 million (the two contributions totaled R$ 271 million). As of December 31, 2022, the outstanding balance, considering the amounts related to radio frequencies and contributions to be made in the EACE entity, is R$ 1,255 million (R$ 3,525 million as of December 31, 2021). The authorizations payable on December 31, 2022 due in long-term is in accordance with the following schedule:
The primary authorizations held by TIM S.A. on December 31,
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