The tax on IoT products and solutions

Understand the challenges IoT faces when taxes are applied to its services and products.

The Internet of Things (IoT) and the ability to share information between objects, users and brands that it offers has demonstrated its constant growth, as already discussed here on the blog. However, its expansion also means an increase in discussions about infrastructure and taxation in an attempt to regulate this technology.

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The tax applied to products and solutions has been one of the main challenges today, generating several debates and disagreements between companies and government.

Taxation

Taxes in Brazil are among the highest in the world. The impact this can have on IoT is directly related to the feasibility of new projects and not the installation of devices. This is because Brazil’s tax burden is calculated based on the function of the object analyzed, privileging the principles of legality and legal certainty, which, in the case of IoT, is very variable and broad.

Some examples show the challenges faced. We can start by mentioning switches. While common switches are considered construction materials, and intelligent switches, due to their functions, like computers, and therefore have a different and higher tax burden.

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IoT technologies, due to their complexity and flexibility, are framed in several existing concepts and provide specific taxes in the Brazilian tax system. They can fall into different categories, such as: sale or rental of goods, provision of common services or provision of telecommunications services.

One of the biggest challenges for developers and channels of IoT products and services is understanding the relationship they establish with telecommunications and information services and, based on that understanding, understanding how they will be taxed.

The need to understand the function of the IoT within the concepts presented exists because the activities carried out by these devices can be both telecommunications and value-added, which have different natures and, therefore, also different taxes.

In cases where the IoT system is used to connect things, through an Internet connection, as is the case with tracking systems, this may be understood as providing telecommunications services.

Already in situations where the Internet is used to connect things, but the user uses other services, income must be understood not as the result of a telecommunications activity, but as activities that use telecommunications as an input to perform a function. This is the case of smart refrigerators that are automated with an Internet connection, but do not allow the user to take advantage of this connection, but only the optimization of the functions of the refrigerator itself.

The big problem that arises, in reality, is that there is great difficulty in framing the utilities of the IoT in the concepts that the legislation presents, creating situations subject to interpretation, cases in which the treasury generally ends up deciding on the option that offers the highest taxation.

Current proposals

The Federal Government moved to publish the final phase of the study on IoT in October 2017 and officially launch, in the same month, the National IoT Plan, in which public investment proposals for the next 5 years will be defined as priorities.

What is most debated on the topic is the question of regulating IoT-related activities. What is expected is that the characteristics of the national tax system will be taken into account when establishing taxes and incentives, offering greater legal certainty to entrepreneurs and investors of these technologies.

All these discussions have focused on promoting IoT-related technology incubators and startups by reducing the tax burden, ensuring access to exclusive credit lines and offering better competitive conditions. The proposals analyzed also include the creation of modernization programs that aim to offer greater access to the resources of sectoral funds.

In this way, we see that, although government intervention seems to have favorable intentions for the development of the technology, the way in which taxes are established by Brazilian legislation is a constant source of concern, in particular for the IoT, which is based on the connection of devices and users and which ends up being framed, and in most cases, in the taxation of telecommunications.

Therefore, many operators and most industries believe that the lack of regulation and government interference can encourage the adoption and massification of these technologies, as the government would only make the process more bureaucratic.