Brazil Government to Fight State Pay-Television Tax Increase

Brazil’s federal government will lobby against a proposal by state-level officials to more than double taxes on pay-television services from companies such as America Movil SAB and DirecTV.

Communications Minister Paulo Bernardo said yesterday he’ll seek to convince state finance secretaries to drop plans to raise the so-called ICMS tax on cable and satellite services to 25 percent from 10 percent. Such an increase would hurt industry growth, Bernardo said in an interview in Brasilia.

America Movil is relying on demand for pay-TV services to boost its business in Brazil, its second-biggest market behind Mexico, as its mobile-phone unit’s expansion slows. Its shares fell the most in more than three months yesterday after a state official said finance secretaries may increase the tax.

“The Brazilian pay-TV market has been the one bright spot in America Movil’s Brazilian operations,” said Kevin Smithen, an analyst at Macquarie Capital USA Inc. in New York, in a phone interview yesterday. “Increased regulation and taxation could have an impact on the growth trajectory in that business.” He has the equivalent of a buy rating on America Movil shares.

America Movil’s Brazilian pay-TV revenue climbed 26.6 percent last quarter from a year earlier, compared with a 2.4 percent decline in the wireless business. Shares in the company, controlled by billionaire Carlos Slim, rose 0.9 percent to 16.31 pesos at the close in Mexico City after sliding 2 percent yesterday, the biggest decline since June 1.

Vote Scheduled

Confaz, the board that brings together state finance secretaries, plans to vote on the tax proposal Sept. 28, Claudio Trinchao Santos, the group’s coordinator, said in an interview Sept. 19. Raising the rate to 25 percent would match the tax assessed for phone services, he said.

An increase would take advantage of expected growth in the pay-TV market and prevent phone companies from arguing that they should pay only 10 percent when selling combinations of video, voice and Internet service, he said.

America Movil, which gets 32 percent of Brazilian sales and 8 percent of overall revenue from pay-TV in the South American country, may decide to absorb much of the tax increase to maintain growth, Michel Morin, an analyst at Morgan Stanley in New York, said yesterday in a research note.

Consumer bills may increase 22 percent if the tax increase is approved as companies pass along the cost to customers, Joao Rezende, president of the nation’s telecommunications regulator, said yesterday in an interview in Brasilia.

Already Benefiting

State governments are already benefiting from pay-TV’s growth, Bernardo said. Pay-TV subscriptions will more than double by 2014, reaching 50 percent of Brazilian households, he said.

“That will increase tax revenue for the states,” Bernardo said. “We have high taxes already, and consumers are the ones that pay the price. It’s terrible news at a time when we’re trying to cut taxes.”

Brazilian pay-TV subscriptions will jump to 17 million by the end of the year from 12.7 million in 2011, according to estimates from Anatel, as the telecommunications agency is known. By 2018, Anatel expects 35 million subscribers. The tax increase would force Anatel to revise those projections, Rezende said.

Biggest Carriers

America Movil, through its Embratel and Net Servicos units, has 55 percent of Brazilian pay-TV subscribers, followed by El Segundo, California-based DirecTV, with 30 percent, according to data from Anatel. DirecTV fell 0.1 percent to $52.31 in New York.

Oi SA, the phone carrier based in Rio de Janeiro, dropped 3.5 percent to 8.11 reais in Sao Paulo trading, while Telefonica Brasil SA, controlled by Madrid-based Telefonica SA, gained 0.2 percent to 44.64 reais.

A Telefonica Brasil representative declined to comment yesterday, while officials at Oi and America Movil didn’t return phone and e-mail messages.

“The clients are the ones who will pay for the tax increase,” Bernardo said. “The company will pass it through on their accounts. That means growth and also investments will be hindered.”

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