New IT Law will encourage startups and developers

The Brazilian Information Technology Law will undergo a revision to suit the industry’s new era. In force for 25 years, the law, which provides tax incentives to companies that invest in local research and development, is considered outdated because it’s mainly focused on hardware production. The proposal is to broaden its scope, to include also stimulus to the new higher-value-added production stages, as well as to software, such as the development of apps.

One focus will be on digital entrepreneurship, incorporating mechanisms to support startups. Many of these companies, which did not exist with the current profile at the time the law was enacted, still struggle to reach the market.

Discussions about changes in the IT Law bring together representatives of the executive and legislative branches as well as from the industry. The debate happens at a time when information technology is increasing its prominence in the era of the "internet of things."

Last week, a working group was created with representatives of six ministries and the National Telecommunications Agency (Anatel) to establish the Brazilian Digital Strategy. This group will present a public-policy proposal, to be implemented by decree, with guidelines to consolidate the different digital programs, conducted in the various areas of the government linked to the digital economy and information technology.

The adjustments in the Information Technology Law will occur along with the adaptations that, everything suggests, will be necessary to meet World Trade Organization (WTO) requirements. The WTO has already signaled that it will establish sanctions against Brazil.

For the WTO, the IT Law is discriminatory because it establishes tax benefits — such as reduction and even exemption from the Tax on Industrialized Products (IPI) — only for those that manufacture in the country. One of the ways being discussed is to extend the benefits to imported products, provided that the company invests in research and development in Brazil.

"Our response to the WTO has been in the sense that we are going to defend the law. We argue that our policy does not cause any harm to the imported product. But the indication is that our arguments are not accepted," says Maximiliano Martinhão, IT policy secretary of the Ministry of Science, Technology, Innovations and Communications (MCTIC), who coordinates the Brazilian Digital Strategy work.

The Brazilian government already has a preliminary document with the WTO’s assessments. But it can only appeal after it receives the official version — which was expected for February. The Brazilian government will then have 30 to 60 days to do it. The WTO’s definitive ruling is expected for the second half, although there’s a chance the decision will come only in 2018.

The clash with the WTO has been pointed as one of the most serious trade disputes that Brazil has faced in recent years. It has created uproar among companies that assemble products in Brazil, including multinationals. Sweden’s Ericsson has already told the government it would suspend local production if tax breaks are suspended.

The law establishes the IPI exemption for production of computers and other technology products developed locally. For those assembled in the country, according to the rules of the Basic Productive Process (PPB), the tax reduction amounts to 95% and in some cases are there is even full exemption, depending on the product, in the North, Northeast and Central-West regions. In the South and Southeast, the discount varies from 80% to 95% depending on the product.

The IT Law had not been challenged until the European Union and Japan, in late 2013 and again in 2015, requested consultations with Brazil about tax regimes and the industrial policy adopted in the country. The WTO also disputed the so-called “Lei do Bem” (benefits for R&D investments), and the Padis (semiconductors) and Inovar-Auto (auto industry) programs — which value national technology and local production.

For Ambassador Rubens Barbosa, challenging the Inovar-Auto was "the main goal" of the European Union and Japan at the WTO. These countries were concerned about a possible demonstration effect among other developed countries. "But not to focus only on this sector, they also included information technology,” he says. The ambassador is director for International Relations at the Brazilian Electrical and Electronics Industry Association (Abinee) and consultant on the topic.

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