20-F 1 dp37766_20f.htm FORM 20-F


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
 
o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2012
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________________ to ________________
OR
 
o
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:  001-14491
 
TIM PARTICIPAÇÕES S.A.
(Exact name of Registrant as specified in its charter)
 
TIM HOLDING COMPANY
THE FEDERATIVE REPUBLIC OF BRAZIL
(Translation of Registrant’s name into English)
(Jurisdiction of incorporation or organization)

Avenida das Américas, 3,434 - 7º andar
22640-102 Rio de Janeiro, RJ, Brasil
(Address of principal executive offices)
Claudio Zezza
Chief Financial Officer
TIM Participações S.A.
Avenida das Américas, 3,434 - 7º andar
22640-102 Rio de Janeiro, RJ, Brazil
Tel: 55 21 4009-4000 / Fax: 55 21 4009-3990
czezza@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
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
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
2,417,632,647
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   x Yes      o  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.   o Yes     x   No
 
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.   x Yes      o  No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   o Yes       o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one):
Large accelerated filer  x                                                                  Accelerated filer  o                                                  Non-accelerated filer  o
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
o  U.S. GAAP             x  International Financial Reporting Standards as issued by the International Accounting Standards Board       o  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.
o  Item 17       o  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)
o  Yes                   x  No
 


 
 
 
 
 


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In this annual report, TIM Participações S.A., a publicly-held company (sociedade anônima) organized under the laws of the Federative Republic of Brazil, is referred to as “TIM,” “TIM Participações,” the “Company” or the “Holding Company.”  References to “we,” “us” and “our” are to TIM together with, where the context so requires and as explained more fully below, one or more of TIM Sul S.A. (“TIM Sul”), TIM Nordeste Telecomunicações S.A. (“TIM Nordeste Telecomunicações”), TIM Celular S.A. (“TIM Celular”), Maxitel S.A. (“TIM Maxitel”), Intelig Telecomunicações Ltda. (“Intelig”), TIM Fiber SP Ltda. (“TIM Fiber SP”) and TIM Fiber RJ S.A. (“TIM Fiber RJ” and together with TIM Fiber SP, “TIM Fiber”), each a directly or indirectly wholly-owned operating subsidiary of the Holding Company and a corporation organized under the laws of the Federative Republic of Brazil.
 
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, under the symbol “TSU.”
 
Prior to August 2, 2011 we had common shares and preferred shares listed on the BM&FBOVESPA under the symbols “TCSL3” and “TCSL4,” respectively, and our ADSs each represented ten preferred shares. As part of our migration to the Novo Mercado listing segment of the BM&FBOVESPA, 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 BM&FBOVESPA, under 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.
 
Market Share Data
 
Market share information is calculated by us based on information provided by Brazil’s National Telecommunications Agency (Agência Nacional de Telecomunicações, or “Anatel”).  Penetration data is calculated by us based on information provided by the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística, or “IBGE”).
 
Presentation of Financial Information
 
We maintain our books and records in reais.  We prepared our consolidated financial statements included in this annual report in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”).  The selected financial information for the Company included in “Item 3A. Key Information—Selected Financial Data” should be read in conjunction with, and is qualified in its entirety by, the IFRS financial statements of the Company and “Item 5. Operating and Financial Review and Prospects” appearing elsewhere in this annual report.
 
The preparation of financial statements in conformity 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 4 to our consolidated financial statements.
 
On December 30, 2009, TIM Participações S.A. acquired Holdco Participações Ltda. (“Holdco”), which held 100% of the ownership of the telecommunications company Intelig, from JVCO Participações Ltda. (“JVCO”) in exchange for a 5.14% participation in TIM Participações’ capital stock.  We have included Intelig in our results of operations since November 30, 2009.  Because Intelig is included in all 12 months of our 2010 results but only one month of 2009, our results of operations in 2010 are not fully comparable with our results of operations in 2009.
 
On October 31, 2011 we completed the acquisition of all of AES Elpa S.A.’s equity interests in Eletropaulo Telecomunicações Ltda. and 98.3% of the interest of AES Communications Rio de Janeiro S.A.  We have included the results of operations of Eletropaulo Telecomunicações Ltda. and AES Communications Rio de Janeiro S.A. in our consolidated results of operations from November 1, 2011.  The inclusion of these companies in our results of operations for the final two months of the year ended December 31, 2011 affects the comparability of our results of
 
 
operations with the years ended December 31, 2010 and 2012.  See “Item 5.  Operating and Financial Review and Prospects—Factors Affecting the Comparability of  our Results of Operations—Acquisition of AES Atimus.”
 
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 3A. Key Information—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 Banco Central do Brasil or Central Bank of Brazil (the “Central Bank”) at December 31, 2012 of R$2.0435 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:
 
 
·
Brazilian wireless industry conditions, size and trends;
 
 
·
characteristics of competing networks’ products and services;
 
 
·
estimated demand forecasts;
 
 
·
growing our subscriber base and especially our postpaid subscribers;
 
 
·
development of additional sources of revenue;
 
 
·
strategy for marketing and operational expansion;
 
 
·
achieving and maintaining customer satisfaction;
 
 
·
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:
 
 
·
government policy and changes in the regulatory environment in Brazil;
 
 
·
an increase in the number of competitors in the telecommunications industry that could affect our market share;
 
 
·
increased competition from global and local OTT (Over The Top players (operators such as mobile virtual network operators or branded resellers offering content and services on the internet without owning their own proprietary telecommunications network infrastructure);
 
 
·
increased competition in our principal markets that could affect the prices we charge for our services;
 
 
·
our ability to strengthen our competitive position in the Brazilian mobile telecommunications market;
 
 
·
our ability to develop and introduce new and innovative technologies that are received favorably by the market, and to provide value-added services to encourage the use of our network;
 
 
·
the introduction of transformative technologies that could cause a significant decrease in revenues for all mobile telephone carriers;
 
 
·
our ability to integrate acquired businesses and implement operational efficiency;
 
 
·
our ability to operate efficiently and to refinance our debt as it comes due, particularly in consideration of uncertainties in credit and capital markets;
 
 
·
our ability to attract and retain qualified personnel;
 
 
·
our ability to integrate companies and assets that we acquire;
 
 
·
the effect of exchange rate fluctuations;
 
 
·
the outcome of litigation, disputes and investigations in which we are involved or may become involved; and
 
 
·
other factors identified or discussed under “Item 3. Key Information—D. Risk Factors” and elsewhere in this annual report.
 
 
 
 
Not applicable.
 
 
Not applicable.
 
 
A. 
Selected Financial Data
 
The selected financial data presented below should be read in conjunction with our consolidated financial statements, including the notes thereto.  Our consolidated financial statements included herein as of and for the years ended December 31, 2012, 2011 and 2010 have been audited by PricewaterhouseCoopers Auditores Independentes.  The report of PricewaterhouseCoopers Auditores Independentes on the consolidated financial statements appears elsewhere in this annual report.
 
Our first financial statements prepared in accordance with IFRS were those as of and for the year ended December 31, 2010, which contain comparative amounts related to the year ended December 31, 2009, also prepared under IFRS.  These financial statements were filed with the CVM and made publicly available in Brazil.
 
Until December 31, 2009, our consolidated financial statements were prepared in accordance with Brazilian GAAP.  Brazilian GAAP is based on the Brazilian corporate law No. 6,404 of December 15, 1976, as amended, and included the provisions of Law No. 11,638/07 and Law No. 11,941/09; the accounting standards issued by the CFC; the accounting standards issued by the CPC; and the rules and regulations issued by the CVM. After the adoption of CPCs No. 15 to 43, Brazilian GAAP does not differ from IFRS as regards the preparation of consolidated financial statements.  The comparative figures with respect to 2009 have been restated to reflect adjustments made as a result of the adoption of IFRS.
 
Our summary financial data prepared in accordance with IFRS is not comparable with our summary financial data prepared in accordance with Brazilian GAAP presented below as of and for the year ended December 31, 2008 and in previous annual reports on Form 20-F.  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, 2012 have been translated into U.S. dollars at the commercial market rate in effect on December 31, 2012 (as reported by the Central Bank of R$2.0435 to U.S.$1.00).  See “Item 3. Key Information—A. Selected Financial Data—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.”
 
        As of and for the Year Ended December 31,    
     
2012
U.S.$
     
2012
R$
     
  2011 (Restated)
R$
     
  2010 (Restated)
R$
     
2009 (Restated)
R$
 
     
(thousands of reais or U.S. dollars, unless otherwise indicated)
 
Income Statement Data:
                                       
Net operating revenue
    9,182,259       18,763,947       17,085,977       14,457,450       13,158,134  
Cost of service provided and goods sold
    (4,835,324 )     (9,880,984 )     (8,542,639 )     (7,286,311 )     (6,672,369 )
Gross profit
    4,346,936       8,882,963       8,543,338       7,171,139       6,485,765  
Operating revenue (expenses)
                                         
Selling expenses
    (2,336,267 )     (4,774,161 )     (4,848,512 )     (4,494,608 )     (4,436,751 )
General and administrative expenses
    (504,009 )     (1,029,943 )     (963,394 )     (1,008,694 )     (1,033,438 )
 
 
        As of and for the Year Ended December 31,  
     
2012
U.S.$
     
2012
R$
     
  2011 (Restated)
R$
     
 2010 (Restated)
R$
     
2009 (Restated)
R$
 
     
(thousands of reais or U.S. dollars, unless otherwise indicated)
 
Other revenue (expenses), net
    (370,645 )     (757,414 )     (669,093 )     (467,703 )     (462,114 )
Operating profit before financial income (expense)
    1,136,014       2,321,445       2,062,339       1,200,134       553,462  
Financial income (expenses)
    (82,195 )     (167,965 )     (238,858 )     (245,457 )     (245,115 )
Income before income tax and social tax contribution
    1,053,819       2,153,480       1,823,481       954,677       308,347  
Income tax and social contribution
    (344,797 )     (704,592 )     (545,636 )     1,257,038       33,026  
Net income for the year
    709,023       1,448,888       1,277,845       2,211,715       341,373  
Net income per share
    0.29337       0.59950       0.56450       0.8955       0.1379  
Diluted net income per share
    0.29333       0.59943       0.56420       0.8955       0.1379  
Number of shares outstanding:
                                       
Common shares (in millions)
    2,418       2,418       2,418       843       843  
Preferred shares (in millions)
    0       0       0       1,632       1,632  
Dividends per share
    0.0696       0.1423       0.1259       0.2006       0.1251  
Balance Sheet Data:
                                       
Property, plant, equipment and intangibles, net
    6,633,569       13,555,699       12,493,487       10,427,637       9,741,375  
Total assets
    12,776,597       26,108,977       23,533,424       19,397,273       16,109,896  
Loans and financing
    2,148,321       4,390,095       3,660,583       3,234,670       3,549,219  
Shareholders’ equity
    6,769,204       13,832,870       12,953,354       10,300,809       7,695,618  
Capital stock
    4,815,155       9,839,770       9,839,770       8,149,096       7,613,610  
Cash Flow Data:
                                       
Operating Activities:
                                       
Net cash provided by operations
    2,429,737       4,965,169       4,154,180       4,009,472       3,035,559  
Investing Activities:
                                       
Net cash used in investing activities
    (1,748,140 )     (3,572,326 )     (4,319,253 )     (2,581,475 )     (2,544,848 )
Financing Activities:
                                       
Net cash provided (used) in financing activities
    (110,554 )     (225,918 )     1,051,696       (1,464,789 )     390,770  
Increase (decrease) in cash and cash equivalents
    571,042       1,166,925       886,623       (36,792 )     881,481  
Cash and cash equivalents at beginning of year
    1,596,699       3,262,855       2,376,232       2,413,024       1,531,543  
Cash and cash equivalents at end of year
    2,167,741       4,429,780       3,262,855       2,376,232       2,413,024  


The following table sets forth financial information as of and for the year ended December 31, 2008 and has been prepared in accordance with Brazilian GAAP, which was the basis for the preparation of our consolidated financial statements prior to December 31, 2009.  See “Presentation of Financial and Other Information.”  Our first financial statements prepared in accordance with IFRS were those as of and for the year ended December 31, 2010, which contain comparative amounts related to the year ended December 31, 2009, also prepared under IFRS.  The financial information as of and for the year ended December 31, 2008 presented below is not comparable to the financing information as of and for the years ended December 31, 2012, 2011, 2010 and 2009.  Certain information below is presented in accordance with US GAAP.
 
   
As of and for the Year Ended December 31,
 
   
2008(1) as adjusted
 
   
(millions of reais, unless otherwise indicated)
 
Statement of Operations Data:
     
Brazilian GAAP
     
Net operating revenue
    13,147.2  
Cost of goods and services
    (7,063.8 )
Gross profit
    6,083.4  
Operating expenses:
       
Selling expenses
    (4,098.4 )
General and administrative expenses
    (1,127.4 )
Other net operating expense
    (366.7 )
Operating income (loss) before financial income (expenses)
    490.9  
Net financial income (expense)
    (375.0 )
Operating income (loss)
    115.9  
Net non-operating income (expense)
     
Income (loss) before taxes and non-controlling interests
    115.9  
Income and social contribution taxes
    64.3  
Minority interests
     
Net income (loss)
    180.2  
Net income (loss per share (reais) 
    0.08  
Number of shares outstanding:
       
Common shares (in millions)
    798  
Preferred shares (in millions)
    1,545  
Dividends per shares (reais)(2) 
    0.11  
U.S. GAAP
       
Net operating revenues
    13,150.0  
Operating income (expense)
    52.1  
Net income (loss)
    151.5  
Balance Sheet Data:
       
Brazilian GAAP
       
Property, plant, equipment and software, net
    6,971.4  
Total assets
    16,239.5  
Loans, financing and debentures
    3,497.7  
Shareholder’s equity
    7,790.5  
Capital stock
    7,613.6  
U.S. GAAP
       
Property, plant, equipment and software, net
    6,781.6  
Total assets
    16,339.9  
Loans and financing
    3,497.7  
Shareholders’ equity
    7,876.6  

(1)
Amounts have been adjusted to reflect the reclassification of “penalties for contract break” to service revenues, previously classified as other operating income.
 
 
(2)
Dividends per share have been computed as the sum of dividends and interest on shareholders’ equity (“juros sobre capital próprio,” according to Brazilian law), an alternative under Brazilian Corporations Law to the distribution of dividends to shareholders. The distribution of dividends and interest on shareholders’ equity, in each year, proceeded according to the terms set forth by our common shareholders, at the relevant annual general meeting. Dividends per share have been determined as the sum of declared dividends and interest on shareholders’ equity, divided by the total number of common shares and preferred shares outstanding as of the common shareholders’ meeting date. See “Item 10E. Additional Information—Taxation—Brazilian Tax Considerations—Distributions of Interest on Capital.”
 
Brazilian Economic Environment
 
Our business, prospects, financial condition and results of operations are dependent on general economic conditions in Brazil.
 
In 2010, the Brazilian economy continued to recover from the global financial crisis of 2008.  Brazilian GDP increased by 7.5%, continuing the rapid economic expansion from late 2009 and early 2010, reaching a value of approximately U.S.$2.024 trillion.  The official inflation rate in Brazil (Índice de Preços ao Consumidor Amplo, or “IPCA”) ended 2010 at 5.91%, the highest rate since 2004.  To manage market expectations, the government initiated a process of monetary contraction by increasing the Special System of Settlement and Custody basic interest rate (Sistema Especial de Liquidação e Custódia or “SELIC” (which is the benchmark interest rate payable to holders of certain securities issued by the Brazilian government) to 10.75% per annum at the end of 2010, from 8.75% per annum in 2009.
 
The rate of inflation in Brazil accelerated during the first half of 2011, causing the government to respond with a further tightening of monetary policy.  Through June 2011, the inflation rate was of 3.87%, equivalent to a twelve-month rate of 6.71%, exceeding the target set by the Central Bank.  The SELIC rate was revised, positively and negatively, during 2011 and was 11.00% as of December 31, 2011.  The IPCA ended the year with an increase of 6.4%, the highest since 2004. Low unemployment in Brazil and the expansion of the domestic market contributed to strong domestic spending.
 
In 2011, the Brazilian government remained active in foreign exchange markets in an effort to curb the appreciation of the real.  In addition to participating almost daily in the foreign exchange market buying dollars, the government adopted several measures to contain the appreciation of the real against the dollar, such as an increase of the tax on financial operations (Imposto sobre Operações Financeiras, or “IOF”) and restrictive measures in relation to foreign investment in Brazil.  Despite these measures, the U.S. dollar depreciated 5.9% against the real in the first half of 2011.  Foreign exchange markets began to shift in the second half of 2011, and the real depreciated 20% against the U.S. dollar.  In 2011, the accumulated surplus increased 47.8% compared to 2010, from U.S.$20.1 to U.S.$29.8 billion, the largest increased since 2007.  The accumulated surplus increased U.S.$19.5 billion in 2012, a 34.7% drop when compared to 2011.  This reduction was attributable in large part to the slow pace of global consumption in 2012.
 
In 2012, the Central Bank undertook a systematic easing of monetary policy in an effort to stimulate growth.  The SELIC rate was cut to 10.50% on January 18, 2012, to 9.75% on March 7, 2012, to 9.00% on April 18, 2012, to 8.50% on May 30, 2012, and to 7.5% on August 29, 2012, and to 7.25% on October 10, 2012, where it remained as of December 31, 2012. The trend of a depreciating real reversed in the first quarter of 2012, with the real reaching R$1.71 per U.S.$1.00 in late February 2012, only to continue its depreciation throughout much of the rest of the year, ending the year at R$2.04 per U.S. $1.00.  The official inflation rate was 5.8% in 2012, below the 6.4% recorded in 2011 but well above the 4.5% rate targeted by the Central Bank.  Inflation in 2012 was negatively impacted by food and housing prices, which increased 9.86% and 6.79%, respectively.
 
During 2012, the continued uncertainty in Europe, particularly in Greece, Spain, Italy and Portugal, intensified concerns regarding the fiscal sustainability and risk of sovereign default of those countries, reducing the confidence of international investors and bringing volatility to the markets. Further, although the U.S. showed better financial conditions and stronger job market indicators in early 2012, its growth for the remainder of 2012 remained low given higher savings requirements, tighter fiscal policy and low global growth rates. The continued financial
 
 
deterioration of these countries appears to have impaired the global economy and, indirectly, the growth of emerging markets, including Brazil and China, which experienced growth well below forecasts in 2012.
 
The table below sets forth data regarding GDP growth, inflation, interest rates and real/U.S. dollar exchange rates in the periods indicated:
 
   
For the Year Ended December 31,
 
   
2012
   
2011
   
2010
 
GDP growth (1)
    0.90 %     2.7 %     7.5 %
Inflation (IGP-M) (2)
    7.81 %     5.10 %     11.32 %
Inflation (IPCA) (3)
    5.8 %     6.5 %     5.91 %
DI Rate (4)
    6.90 %     10.87 %     10.64 %
TJLP (5)
    5.50 %     6.0 %     6.0 %
Appreciation (devaluation) of the real against the U.S. dollar
    8.94 %     12.59 %     (4.3 )%
Exchange rate (closing)—R$ per U.S.$1.00
    2.0435       1.8751       1.6654  
Average exchange rate—R$ per U.S.$1.00 (6)
    1.9550       1.6738       1.7684  

(1)
Brazilian GDP for 2012, 2011 and 2010 was calculated using the new procedures adopted by the IBGE.
 
(2)
Inflation (IGP-M) is the general market price index as measured by FGV, and represents data accumulated over the 12 months in each year ended December 31, 2012, 2011 and 2010.
 
(3)
Inflation (IPCA) is a consumer price index measured by IBGE, and represents data accumulated over the 12 months in each year ended December 31, 2012, 2011 and 2010.
 
(4)
The DI rate is the average inter-bank deposit rate performed during the day in Brazil (accrued as of the last month of the period, annualized).
 
(5)
Represents the interest rate applied by BNDES in long-term financings (end of the period).
 
(6)
Average exchange rate on the last day of each year.
 
Sources:  Banco Nacional de Desenvolvimento Econômico – BNDES, Central Bank, Fundação Getulio Vargas – FGV, and IBGE.
 
Exchange Rates
 
We will 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 will 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 will affect 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.”
 
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.  The real depreciated against the U.S. dollar by 15.7% in 2001 and 34.3% in 2002. Although the real appreciated by 22.3%, 8.8%, 13.4%, 9.5% and 20.7% against the U.S. dollar in 2003, 2004, 2005, 2006 and 2007, respectively, in 2008, as a result of the international financial and economic crisis, the real depreciated against the U.S. dollar by 24.0%.  In 2009 and 2010, the real appreciated against the U.S. dollar by 25.5% and 4.3%, respectively.  In 2011, the real depreciated by 4.8% against the U.S. dollar.  On December 31, 2011, the period-end real/U.S. dollar exchange rate was R$1.8758 per U.S.$1.00. In 2012, the real depreciated a further 8.94% against the U.S. dollar.  On December 31, 2012, the period-end real/U.S. dollar exchange rate was R$2.0435 per U.S. $1.00.
 
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.  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.
 
The following table shows the selling rate for U.S. dollars for the periods and dates indicated.  The information in the “Average” column represents the annual average of the exchange rates during the periods presented.
 
   
Reais per U.S. dollar
 
Year
 
High
   
Low
   
Average
   
Year End
 
2008
    2.5004       1.5593       1.8375       2.3370  
2009
    2.4218       1.7024       1.9935       1.7412  
2010
    1.8811       1.6554       1.7593       1.6662  
2011
    1.9016       1.5345       1.6746       1.8758  
2012
    2.1121       1.7024       1.9550       2.0435  

 
   
Reais per U.S. dollar
 
Month
 
High
   
Low
 
October 2012
    2.031       2.030  
November 2012
    2.107       2.069  
December 2012
    2.112       2.044  
January 2013
    2.046       1.988  
February 2013
    1.989       1.957  
March 2013
    2.019       1.953  
April 2013 (through April 24)
   
2.024
      1.974  

Source: Central Bank/Bloomberg
 
On April 24, 2013, the selling rate was R$2.024 to US$1.00.  The real/dollar exchange rate fluctuates and, therefore, the selling rate at April 24, 2013 may not be indicative of future exchange rates.
 
Brazilian law provides that, whenever there is a serious imbalance in Brazil’s balance of payments or serious reasons to foresee such imbalance, temporary restrictions may be imposed on remittances of foreign capital abroad. For approximately six months in 1989, and early 1990, for example, the Federal Government froze all dividend and capital repatriations that were owed to foreign equity investors. These amounts were subsequently released in accordance with Federal Government directives. There can be no assurance that similar measures will not be taken by the Federal Government in the future.
 
B. 
Capitalization and Indebtedness
 
Not applicable.
 
C. 
Reasons for the Offer and Use of Proceeds
 
Not applicable.
 
D. 
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.
 
 
Risks Relating to our Business
 
Our business will be adversely affected if we are unable to successfully implement our strategic objectives.  Factors beyond our control may prevent us from successfully implementing our strategy.
 
Our business strategy is aimed at improving revenues and selective growth, while maintaining financial discipline.  To achieve this goal, seek to strengthen our market position by leveraging mobile telephony to increase broadband usage and exploiting opportunities arising from fixed-to-mobile substitution.
 
Our ability to implement our strategy is influenced by many factors outside of our control, including:
 
 
·
government policy and changes in the regulatory environment in Brazil;
 
 
·
an increase in the number of competitors in the telecommunications industry that could affect our market share;
 
 
·
increasing competition from global and local OTT (Over The Top) players (operators such as mobile virtual network operators or branded resellers offering content and services on the internet without owning their own proprietary telecommunications network infrastructure);
 
 
·
increased competition in our principal markets that could affect the prices we charge for our services;
 
 
·
our ability to strengthen our competitive position in the Brazilian mobile telecommunications market;
 
 
·
our ability to develop and introduce new and innovative technologies that are received favorably by the market, and to provide value-added services to encourage the use of our network;
 
 
·
the introduction of transformative technologies that could cause a significant decrease in revenues for all mobile telephone carriers;
 
 
·
our ability to integrate acquired businesses and implement operational efficiency;
 
 
·
our ability to operate efficiently and to refinance our debt as it comes due, particularly in consideration of uncertainties in credit and capital markets;
 
 
·
our ability to attract and retain qualified personnel;
 
 
·
our ability to integrate companies and assets that we acquire;
 
 
·
the effect of exchange rate fluctuations;
 
 
·
any difficulties we may encounter in our supply and procurement processes, including as a result of the insolvency or financial weakness of our suppliers; and
 
 
·
the costs we may incur due to unexpected events, in particular where our insurance is not sufficient to cover such costs.
 
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 timeframes described.
 
We face increasing competition, which may adversely affect our results of operations.
 
The opening of the Brazilian market to competition for telecommunications services has adversely affected historical margins in the industry.  We face increased competition throughout Brazil from new entrants in the personal communications service, or “PCS,” market.  We compete with providers of wireless services and trunking and with providers of fixed-line telecommunications and Internet access services, because of the trend toward the convergence and substitution of mobile services for these and other services and a trend of bundling PCS with Internet and other services. As a result, the cost of maintaining our revenue share has increased and in the future we
 
 
may incur higher advertising and other costs as we attempt to maintain or expand our market presence.  Claro and Vivo Participações S.A., or “Vivo,” received authorization to provide PCS in the same regions as TIM, completing their national coverage. Also, “Oi” (the new Tele Norte Leste Participações S.A. brand) received authorization to provide PCS in the State of São Paulo.
 
We also expect to face increased competition from other wireless telecommunications services, such as digital trunking, because these services are generally less expensive than cellular telecommunications services.  In addition, technological changes in the telecommunications field, such as the development and roll-out of Third and Fourth Generations or “3G” and “4G, “ and Voice over Internet Protocol or “VOIP,” are expected to introduce additional sources of competition.
 
Increased 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 respond to developments in the industry, including new services that may be introduced, changes in consumer preferences, demographic trends, economic conditions and discount pricing strategies by competitors. Additionally, we may face competitors with greater access to financial resources.  We cannot 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.
 
Recent market consolidation, including the merger of Vivo and Telecomunicações de São Paulo S.A. – Telesp, may allow other telecommunications companies to compete more aggressively against us.
 
We may be unable to respond to the recent trend towards consolidation in the Brazilian wireless telecommunications market.
 
The Brazilian telecommunication market has been consolidating and we believe such trend is likely to continue. Additional joint ventures, mergers and acquisitions among telecommunications service providers are possible in the future.  If such consolidation occurs, it 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 face difficulties responding to new telecommunications technologies.
 
The Brazilian wireless telecommunications market is experiencing significant technological changes, as evidenced by, among other factors:
 
 
·
the changing regulatory environment, such as the introduction of number portability;
 
 
·
shorter time periods between the introduction of new telecommunication technologies and subsequent upgrades or replacements;
 
 
·
ongoing improvements in the capacity and quality of digital technology available in Brazil; and
 
 
·
the anticipated auction of licenses for the operation of 3.5 GHz and 10.5 GHz (WI-MAX) bandwidths with limited mobility.
 
We may be unable to keep pace with these technological changes, which could affect our ability to compete effectively and have a material adverse effect on our business, financial condition and results of operations.
 
Our business is dependent on our ability to expand our services and to maintain the quality of the services provided.
 
Our business as a cellular telecommunications services provider depends on our ability to maintain and expand our cellular telecommunications services network.  We believe that our expected growth will require, among other things:
 
 
 
·
continuous development of our operational and administrative systems;
 
 
·
increasing marketing activities; and
 
 
·
attracting, training and retaining qualified management, technical, customer relations, and sales personnel.
 
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, with adverse effects on our business, financial condition and results of operations.
 
Our operations are 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 any event that damages our network may adversely affect our business, financial condition and results of operations.
 
Our operations depend on our ability to maintain, upgrade and efficiently operate accounting, billing, customer service, information technology and management information systems.
 
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. Any 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.
 
We may experience a decrease in customer growth and high rate of customer turnover which could increase our costs of operations and reduce our revenue.
 
Our subscriber acquisition rate can be negatively affected by overall market penetration. Additionally, our high churn rates are primarily a result of our competitors’ aggressive subsidization of handset sales, adverse macroeconomic conditions in Brazil and our strict policy of terminating customers who do not continue to use our services or do not pay their bills on time.  Churn reflects the number of customers who terminate their service or have their service terminated during a period, expressed as a percentage of the simple average of customers at the beginning and end of the period. As indicated by historical churn rates, we may experience a high rate of customer turnover which could increase our cost of operations and reduce our revenue.  Several factors in addition to competitive pressures could influence our subscriber acquisition rate and our churn rate, including limited network coverage, lack of reliable service and economic conditions in Brazil.
 
Our controlling shareholder may exercise its control in a manner that differs from the interests of other shareholders.
 
Telecom Italia, through its ownership of TIM 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 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.
 
System failures could result in reduced user traffic and reduced revenue and could harm our reputation.
 
Our success largely depends on the continued and uninterrupted performance of our information technology, network systems and of certain hardware. Our technical infrastructure (including our network infrastructure 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. Unanticipated problems 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 and our reputation.
 
 
Certain debt agreements of our subsidiaries 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 subsidiaries’ existing debt agreements contain restrictions and covenants and require the maintenance or satisfaction of specified financial ratios and tests.  The ability of our subsidiaries to meet these financial ratios and tests can be affected by events beyond our and their control, and we cannot assure that they 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 of December 31, 2012, we had approximately R$4,279.4 million in consolidated outstanding indebtedness of which 35% was denominated in foreign currency (primarily U.S. dollars), for which we use derivative instruments to offset exposure to foreign currency.  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.  Our net debt position in 2012 of R$151.1 million (loans plus accrued interest and derivatives (liabilities), less cash and cash equivalents, derivatives (assets) and short term investments), means we should not need substantial funding to meet our obligations or to conduct our activities.
 
We are subject to numerous legal proceedings.
 
We and our subsidiaries are party to a number of lawsuits and other proceedings. An adverse outcome in, or any settlement of, these or other lawsuits could result in losses and significant costs to us.  In addition, our senior management may be required to devote substantial time to these lawsuits, which they could otherwise devote to our business.
 
Any modification or termination of our ability to use the “TIM” trade name may adversely affect our business and operating results.
 
Telecom Italia owns the rights to the “TIM” trade name which is currently licensed to us.  Telecom Italia may stop us from using the TIM trade name any time.  The loss of the use of the “TIM” trade name could have a material adverse effect on our business and operating results.
 
The shareholding structure of our parent company, Telecom Italia S.p.A., has undergone significant changes which has subjected us to increased government oversight.
 
On April 28, 2007, Assicurazioni Generali S.p.A., Intesa San Paolo S.p.A., Mediobanca S.p.A., Sintonia S.p.A. and Telefónica S.A. entered into an agreement to acquire the entire share capital of Olimpia S.p.A., a company which, at the time, held approximately 18% of the voting capital of Telecom Itália S.p.A., our indirect parent company.  This acquisition was made through Telco S.p.A., or “Telco.”  With the conclusion of the transaction and the subsequent merger of Olimpia S.p.A. with and into Telco in December 2007, Telco became the holder of 23.6% and currently holds 22.4% of the voting capital of Telecom Italia S.p.A. the indirect parent company of TIM.
 
In connection with the approval of the acquisition, through Act No. 68,276/2007, of October 31, 2007, Anatel imposed certain restrictions to guarantee the total segregation of the business and operations of Telefónica and TIM in Brazil, including, among other things, the obligation that the Telecom Italia group companies directly or indirectly involved in the Brazilian telecommunications sector present Anatel with copies of the minutes of the meetings of their respective boards of directors. On July 7, 2009, Anatel issued Act No. 3,804/2009, that considered accomplished some of the obligations imposed by Act No. 68,276/2007, as well as established other obligations related to the filing of minutes of meetings of the respective boards of directors of the companies which directly or indirectly operate in the Brazilian telecommunication market and minutes of the shareholders meetings in which directors are appointed. The companies in Brazil were also obliged to present information related to the execution of any agreements between companies under the shareholding control of Telefónica and Telecom Italia in connection with telecom services offered in Brazil and also copies of minutes of the meetings of their respective boards of directors in which these agreements are discussed.  On November 8, 2011, Anatel issued a new decision (No. 9,403/2011) clarifying that, according to its interpretation of Act No. 68,276/2007, companies of the Telecom Italia group to which the restrictions were addressed are also obliged to present Anatel with copies of the minutes of all meetings of the respective boards of directors, regardless of whether or not the members of such body were appointed following direct or indirect nomination by Telefónica and whether or not matters concerning activities relating to the provision of telecommunications services in the Brazilian market were discussed. In order to ensure
 
 
full compliance with such restrictions and also considering those clarifications provided by Anatel, some internal procedures were approved and adopted by each of the companies to which the restrictions were addressed, by means of a resolution of the applicable administrative body. Such procedures were approved by our Board of Directors at a meeting held on February 15, 2012. On December 26, 2012, as part of CADE’s review and in view of the documents that had been submitted by each group since the TCD’s approval, CADE’s Attorney General issued a legal opinion that confirmed that most of our obligations were duly satisfied, but required additional information in order to verify possible non-compliance. On February 13, 2013, we submitted our response.
 
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.  In the years ended December 31, 2012, 2011 and 2010, we made allowances for doubtful accounts in the amounts of R$250.9 million, R$231.5 million and R$310.5 million, respectively, primarily due to defaults in payment by our customers.  As a percentage of our gross revenue, our provisions for doubtful accounts amounted to 0.9%, 0.9% and 1.5% in the years ended December 31, 2012, 2011 and 2010, respectively.  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.
 
We may be subject to liability related to outsourcing certain functions to third-party service providers.
 
We may be exposed to liabilities due to our outsourcing of certain functions to third-party service providers, for which we may not have made sufficient provisions. Recent government announcements and legal proceedings have called into question the ability of public service concessionaires to carry out their operations by outsourcing certain functions.  Though no definitive position has been reached by any governmental authority, recent court opinions could set legal precedent that could call into question our ability to outsource certain operations.  This may require us to hire as employees certain workers who currently work for us on an outsourced basis, which could adversely affect our results of operations and financial condition.
 
We depend on key suppliers.
 
We rely on various suppliers and vendors, including Apple, Samsung, Ericsson, Alcatel-Lucent S.A., Huawei and Nokia, to supply network equipment and 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 to supply to us, or may 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 concession agreements.
 
Our infrastructure could be damaged as a result of natural disasters.
 
Our operations may be suspended or interrupted for an indeterminate period if any of our transmission bases are damaged by natural disasters, including by fire, explosion, storms or similar events.  If we are unable to prevent against such damage in the event of a natural disaster, the interruption of our operations would have a material adverse effect on our business and results of operations.
 
Risks Relating to the Brazilian Telecommunications Industry
 
We may be classified by Anatel as an economic group with significant market power, which will subject us to increased regulation.
 
In 2005, Anatel issued specific regulations regarding telecommunications service providers with significant market power. Anatel has indicated that it will establish more stringent regulation for economic groups with significant market power in order to ensure competition.  We cannot give assurance that we will not be deemed to have significant market power, and thus be subject to increased regulatory requirements.
 
 
In July 2006, Anatel issued regulations regarding the remuneration of the mobile operator’s network and introduced the concept of significant market power in the industry.  Under this regulation, the network usage fee, or VU-M, is freely negotiated between operators, but if operators have not negotiated a fee by 2010, Anatel will determine, through an arbitration procedure and based on a fully allocated cost model, a reference value VU-M companies it deems to hold significant market power in their respective service areas.  New rules applicable to PCS operators with regard to this issue are currently being analyzed by Anatel, though currently all PCS operators are considered as having significant market power in their respective service areas. In making future determinations of companies that have significant market power, Anatel will consider market share in the mobile interconnection market and in the mobile services market, economies of scope and scale, infrastructure dominance that cannot be replicated economically, bargaining power vis-à-vis suppliers, existence of vertical integration, existence of barriers to entry and access to financing sources.  For purposes of the mobile network remuneration rules, until Anatel defines which operators have significant market power, all operators that include a PCS provider will continue to be considered as having significant market power in the provision of mobile interconnection in their respective service areas. The new rules for PCS providers regarding the regulation of PGMC (Plano Geral de Metas de Competição), published by Anatel as Resolution No. 600 on November 12, 2012 and implemented on November 26, 2012 could have an adverse effect on our business financial condition and results of operations.
 
We are subject to various obligations in the performance of our activities with which we may be unable to comply.
 
In the performance of our telecommunications services, we are subject to compliance with various legal and regulatory obligations including, but not limited to, the obligations arising from the following:
 
 
·
the rules set forth by Anatel, the primary telecommunications industry regulator in Brazil;
 
 
·
the PCS authorizations under which we operate our cellular telecommunications business;
 
 
·
the fixed authorizations (local, national long distance, international long distance under and multimedia service) under which we operate our telecommunications business;
 
 
·
the Consumer Defense Code; and
 
 
·
the General Telecommunications Law (Law No. 9,472/97, as amended).
 
We believe that we are currently in material compliance with our obligations arising out of each of the above referenced laws, regulations and authorizations. However, in light of the administrative proceedings for breach of quality standards brought since December 2004 by Anatel against TIM Celular and TIM Nordeste, we cannot provide any assurance that we are in full compliance with our quality of service obligations under the PCS authorizations.  In fact, there are some administrative proceedings regarding noncompliance with quality goals and regulatory obligations that resulted in fees levied by Anatel against TIM Celular and TIM Nordeste.
 
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.  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.
 
Extensive government regulation of the telecommunications industry may limit our flexibility in responding to market conditions, competition and changes in our cost structure.
 
Our business is subject to extensive government regulation, including any changes that may occur during the period of our concession to provide telecommunication services. Anatel, which is the main telecommunications industry regulator in Brazil, regulates, among others:
 
 
·
industry policies and regulations;
 
 
·
licensing;
 
 
 
·
rates and tariffs for telecommunications services;
 
 
·
competition;
 
 
·
telecommunications resource allocation;
 
 
·
service standards;
 
 
·
technical standards;
 
 
·
quality standards;
 
 
·
interconnection and settlement arrangements; and
 
 
·
universal service obligations.
 
This extensive regulation and the conditions imposed by our authorization to provide telecommunication services may limit our flexibility in responding to market conditions, competition and changes in our cost structure.
 
Our authorizations may be terminated by the Brazilian government under certain circumstances 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 channel traffic rates, user complaint rates and customer care call completion rates.  Our ability to satisfy these standards, as well as others, may be affected by factors beyond our control.  We cannot assure you 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, in an extreme situation, the termination of our authorizations in the event of material non-compliance.
 
Our radio frequency authorizations for the 800 MHz, 900 MHz and 1800 MHz bands that we use to provide PCS services started to expire in September 2007 (under the Term of Authorization for the State of Paraná except the Londrina and Tamarana municipalities) 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.
 
Our radio frequency authorizations for the 2100 MHz band that we use to provide data services will expire in April 2023 and are renewable for one additional 15-year period, requiring payment in two-year intervals of the equivalent to 2% of the prior year’s service revenue net of tax, including interconnection and excluding value-added services revenues, by way of investment under the Basic and Alternative Service Plans.  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.
 
The telecommunications industry is subject to rapid technological changes and these changes could have a material adverse effect on our ability to provide competitive services.
 
The telecommunications industry is subject to rapid and significant technological changes, including, for example, the introduction of 3G and 4G mobile telephone services.  Our future success depends, in part, on our ability to anticipate and adapt in a timely manner to technological changes.  We expect that new products and technologies will emerge and that existing products and technologies will be further developed.
 
The advent of new products and technologies could have a variety of consequences for us.  New products and technologies may reduce the price of our services by providing lower-cost alternatives, or they may also be superior to, and render obsolete, the products and services we offer and the technologies we use, thus requiring investment in new technology.  If such changes occur, our most significant competitors in the future may be new participants in the market without the burden of an installed base of older equipment.  The cost of upgrading our infrastructure and technology to continue to compete effectively could be significant.
 
 
In addition to competitive pressures, as a result of the increasing substitution of data services in place of traditional voice and SMS communications, our traditional voice and SMS markets also have been decreasing and are expected to continue to decrease due to increasing competition from alternative modes of telecommunications.
 
We face increasing competition from non-traditional data services on new voice and messaging over the internet technologies, in particular over-the-top (OTT) applications, such as Skype, Google Talk, FaceTime and WhatsApp. These applications are often free of charge, other than for data usage, accessible via smartphones, tablets and computers and allow their users to have access to potentially unlimited messaging and voice services over the internet, bypassing more expensive traditional voice and messaging services such as short message service (SMS) which have historically been a source of significant revenues for mobile network operators such as us. With the growing use of smartphones, tablets and computers in Brazil, an increasing number of customers are using OTT application services in substitution for traditional voice or SMS communications.
 
Historically, we have generated a substantial portion of our revenues from voice and SMS services, and the substitution of data services for these traditional voice and SMS volumes has had and is likely to continue to have a negative impact on our revenues and profitability. As a result of these and other factors, we face a mobile market in which price pressure has been increasing.
 
All mobile network operators, including ourselves, are currently competing with OTT application providers who leverage on existing infrastructures and who generally do not operate capital-intensive business models associated with traditional mobile network operators like us. OTT application service providers have recently become more sophisticated competitors, and technological developments have led to a significant improvement in the quality of service, in particular speech quality, delivered via data communications applications such as OTT. In addition, players with strong brand capability and financial strengths, such as Apple, Google and Microsoft, 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 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.
 
Due to the nature of our business we are exposed to numerous consumer claims and tax-related proceedings.
 
Our business exposes us to a variety of lawsuits brought by or on behalf of consumers in the ordinary course of our operations 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 principally to the expiration of prepaid usage credits, minimum term clauses, subscription fees and the use of land to install our network sites.  These suits include claims contesting certain aspects of the fee structure of our prepaid and postpaid plans which are commonplace in the Brazilian telecommunications industry.
 
In addition, federal, state and municipal tax authorities have questioned some tax procedures adopted by us, emphasizing the issues related to the offset of taxes by goodwill amortization as well as questions regarding the calculation of the basis for certain sector-specific contributions (FUST and FUNTTEL). As of December 31, 2012, we are subject to approximately 2,201 tax-related lawsuits and administrative proceedings with an aggregate value of approximately R$6.7 billion, including risks related to lawsuits classified as probable and possible loss.  Although many of these claims relate to general business practices in the Brazilian mobile telecommunications industry, adverse determinations could have an adverse effect on our business practices and results of operations.
 
The mobile industry, including our company, may be harmed by reports suggesting that radio frequency emissions cause health problems and interfere with medical devices.
 
Media and other reports have suggested that radio frequency emissions from wireless handsets and base stations may cause health problems.  If consumers harbor health-related concerns, they may be discouraged from using wireless handsets.  These concerns could have an adverse effect on the wireless communications industry and, possibly, expose wireless providers, including us, to litigation.  We cannot assure you that further medical research
 
 
and studies will refute a link between the radio frequency emissions of wireless handsets and base stations and these health concerns.
 
Government authorities could increase 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.  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.  On July 2, 2002, Anatel published Resolution No. 303 that limits emission and exposure for fields with frequencies between 9 kHz and 300 GHz.  In 2009, the Brazilian government enacted Law No. 11.934 establishing limits related to the magnetic and electromagnetic emissions to be as defined by the World Health Organization and that the operators had to maintain a record of the measurements of the levels of the magnetic and electromagnetic emissions of each transmitting station.  The records must be five years old at most.
 
The new index applied for the remuneration for the use of PCS networks may not be adequate.
 
Since 2006, Anatel uses IST index (Índice de Serviços de Telecomunicações) to adjust Intelig for Fixed Switched Telephone Services (“STFC”) Concessionaires’ rates, Industrial Exploration of Dedicated Lines (“Exploração Industrial de Linha Dedicada” or “EILD”) and remuneration for the use of PCS, which substitutes the General Price Index, or the IGP-DI (the Índice Geral de Preços Disponibilidade Interna), an inflation index developed by the FGV, a private Brazilian foundation.  Thus, the prices we may charge for our services may be indirectly impacted by this new index. Anatel begins to regulate the telecommunications industry based on a model that analyzes company costs based on a hypothetical company’s costs and other factors.  If this new adjustment mechanism, or any other mechanism chosen by Anatel in the future, does not adequately reflect the true effect of inflation on our prices, our results of operations could be adversely affected.  In 2012, the IST presented a much smaller variation than the IGP-DI.
 
Anatel’s proposal regarding the consolidation of prices could have an adverse effect on our results.
 
Anatel issued new regulations on interconnection rules from 1997 to 2005, some of which could have an adverse effect on our results.  The rules that may adversely affect our results are (1) Anatel had defined clearly that the same PCS provider with different authorization areas may receive only one instead of two interconnection charges (“VU-M”) for long distance calls originated and terminated in their networks, and (2) if the free-market negotiation of prices for VU-M is not successful, Anatel is going to apply, in 2012, resolution 576 which contemplates a reduction of around 12% over the mobile interconnection rate and will apply resolution 600 from 2014. From February 2016 on, Anatel proposes a full allocated cost model by allocating the various service costs to determine a basic price.  Final rules regarding these prices are still pending.  These regulations can have an adverse effect on our results of operations because (1) our interconnection charges would likely drop significantly, thereby reducing our revenues, and (2) Anatel may allow more favorable prices for operators without significant market power.
 
The introduction of MVNOs (Mobile Virtual Network Operators) in the Brazilian market could have an adverse effect on our results.
 
In November, 2010, Anatel approved a resolution establishing the rules to permit the exploration of mobile services by means of a virtual network, based on commercial agreements between established operators and virtual operators.  The rules established there could be two types of MVNOs. The first with a business model to provide low-cost mobile phone services by relying on business arrangements with traditional mobile operators to purchase minutes of use (MOU) for sale to their own customers.  The second a full MVNO with an authorization that permitted the provision of services based on a sharing of infrastructure agreement with an established mobile operator.
 
We were the first mobile operator to negotiate a contract with a virtual operator and we are an industry leader in the discussions with Anatel to develop this service. The first contract to be submitted for Anatel’s approval in December 2010 was for an authorization license in partnership with us.  Our commercial partners have opted for the
 
 
authorization license, which carries the obligations and responsibilities for providing the service.  The contracts are negotiated on a case by case basis with the intention to build a specific solution for every new virtual operator.
 
The 4G auction rules brought an obligation to the acquiring operator to make a public offer of the purchased radiofrequency spectrum in the MVNO model. Increased competition from MVNOs could reduce our profitability and the profitability of the mobile telecommunications industry generally, reducing the capacity for investment and innovation.  Such increased competition could have a material adverse effect on our results of operations.
 
The effects of the recent global economic crisis could reduce purchases of our products and services and adversely affect our results of operations, cash flows and financial condition.
 
Although the global economy recently has been showing signs of improvement, there is still uncertainty about the sustainability of any recovery.  Unemployment levels continue to be high by historic standards, and consumers and businesses may postpone spending in response to tighter credit, negative financial news or declines in income or asset values, all of 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.
 
Actual or perceived health risks or other problems relating to mobile handsets or transmission masts could lead to litigation or decreased mobile communications usage.
 
The effects of, and any damage caused by, exposure to an electromagnetic field were and are the subject of careful evaluations 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. For example, the perception of these health risks could result in a lower number of customers, reduced usage per customer or potential consumer liability. 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.
 
Measures adopted by Anatel aiming to ensure service quality could have an adverse effect on our results.
 
In July 2012, with the express goal of improving the quality of mobile telecommunications services provided in Brazil, Anatel issued administrative injunctions suspending the selling and activation of new mobile service plans by three of the primary mobile providers, including Claro and TIM Celular. The suspension was lifted by Anatel only after these providers made formal commitments to undertake specific investments related to the expansion of their respective networks and improvement of their respective services.
 
In November 2012, Anatel issued a new administrative injunction to suspend and stop our “Infinity Day" promotion, in which costumers from specific states were charged per day of use for voice (to TIM numbers and local fixed telephones). Anatem, in their preliminary analysis, considered the promotion to be potentially harmful to the quality of our mobile services. The injunction was revoked in January 2013, after Anatel determined that the promotion did not pose a risk to the provision of our mobile services.
 
Although measures adopted by Anatel such as the aforementioned are likely to be temporary, such measures may, along with any new measures adopted in the future, have a material adverse effect on our financial condition, results of operations and cash flow and may limit our ability to implement our business strategy.
 
 
Risks Relating to Brazil
 
The Brazilian government has exerted significant influence over the Brazilian economy and continues to do so.  This involvement, like local political and economic conditions, may have an adverse effect on our activities, our business, or 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:
 
 
·
fluctuating exchange rates;
 
 
·
inflation;
 
 
·
interest rates;
 
 
·
monetary policy;
 
 
·
changes in tax regimes;
 
 
·
liquidity in domestic capital and credit markets;
 
 
·
fiscal policy;
 
 
·
political instability;
 
 
·
reductions in salaries or income levels;
 
 
·
rising unemployment rates;
 
 
·
tax policies (including those currently under consideration by the Brazilian Congress);
 
 
·
exchange controls and restrictions on remittances abroad; and
 
 
·
other political, diplomatic, social or economic developments in or affecting Brazil.
 
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 securities 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.
 
Tax reforms may affect our prices.
 
In 2010, the Brazilian government increased the tax on financial operations (IOF) rate on foreign investments in fixed income securities from 2% to 4%.  This tax increase was intended to decrease speculation on Brazilian markets and reduce the volatility of appreciation of the real, reinforcing official efforts to discourage foreign investment by increasing transaction costs.  In 2011, the IOF tax was expanded to tax loans entered into by banks and companies outside of Brazil with a maturity of less than 360 days. Additionally, the IOF tax rate related to exchange currency
 
 
increased from 0% to 0.38%, with certain exceptions.  The IOF tax rate related to international loans entered into in Brazil by foreign banks and companies remained at 6% in 2012, however maturity was increased from 360 to 1800 days (approximately 5 years), and subsequently reduced to 720 days and later to 360 days in an effort to manage the flow of foreign capital entering Brazil through offshore loans.  In 2013, the Brazilian government has maintained the IOF tax rate on international loans at 6% and the maturity at 360 days.
 
Inflation, and government measures to curb inflation, may adversely affect the Brazilian economy, the Brazilian securities market, our business and operations and the market prices of our shares or the ADSs.
 
Historically, Brazil has experienced high rates of inflation.  Inflation and some of the Brazilian government’s measures taken in an attempt to curb inflation have had significant negative effects on the Brazilian economy generally.  Inflation, policies adopted to contain inflationary pressures and uncertainties regarding possible future governmental intervention have contributed to economic uncertainty and heightened volatility in the Brazilian securities market.
 
Since the introduction of the real in 1994, Brazil’s inflation rate has been substantially lower than in previous periods. According to the General Market Price Index (Índice Geral de Preços do Mercado, or IGP-M), a general price inflation index developed by Fundação Getulio Vargas – FGV, the inflation rates in Brazil were 1.2% in 2005, 3.8% in 2006, 7.8% in 2007, 9.8% in 2008, negative 1.72% in 2009, 11.32% in 2010, 5.10% in 2011 and 7.81% in 2012.  In addition, according to the National Extended Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo, or IPCA), published by the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística, or IBGE), the Brazilian consumer price inflation rates were, 5.7% in 2005, 3.1% in 2006, 4.6% in 2007, 5.9% in 2008, 4.3% in 2009, 5.9% in 2010, 6.5% in 2011 and 5.8% in 2012.  The Brazilian government’s measures to control inflation have often included maintaining a tight monetary policy with high interest rates, thereby restricting availability of credit and reducing economic growth.  Inflation, actions to combat inflation and public speculation about possible additional actions have also contributed materially to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets.
 
Inflation may increase in Brazil in the future.  Periods of higher inflation may decrease the rate of growth of the Brazilian economy, which could lead to reduced demand for our products in Brazil and decreased net sales.  Inflation is also likely to increase some of our costs and expenses, which we may not be able to pass on to our customers and, as a result, may reduce our profit margins and net income.  In addition, higher inflation generally leads to higher domestic interest rates, and, as a result, the costs of servicing our debt may increase, resulting in lower net income.  Inflation and its effect on domestic interest rates can, in addition, lead to reduced liquidity in the domestic capital and lending markets, which could affect our ability to refinance our indebtedness in those markets. Any decline in our net sales or net income and any deterioration in our financial condition would also likely lead to a decline in the market price of our shares and the ADSs.
 
Exchange rate movements may adversely affect our financial condition and results of operations.
 
The Brazilian currency has been devalued frequently over the past four decades.  Throughout this period, the Brazilian government has implemented various economic plans and exchange rate policies, including sudden devaluations, periodic mini-devaluations (during which the frequency of adjustments has ranged from daily to monthly), exchange controls, dual exchange rate markets and a floating exchange rate system.  From time to time, there have been significant fluctuations in the exchange rate between the Brazilian currency and the U.S. dollar and other currencies.  For example, the real depreciated against the U.S. dollar by 15.7% in 2001, 34.3% in 2002, 32% in 2008, 4.8% in 2011 and 8.94% in 2012.  Notwithstanding the fact that the real has appreciated 11.5%, 8.7%, 25.4%, and 4.3% in 2006, 2007, 2009 and 2010, respectively, there can be no guarantees as to whether the real will depreciate or appreciate against the U.S. dollar in the future.
 
Continuing 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 our exports and adversely affect our net sales and our 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.  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 our 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.
 
Fluctuations in interest rates may have an adverse effect on our business and the market prices of our shares or the ADSs.
 
The Central Bank establishes the basic interest rate target (the SELIC rate) for the Brazilian financial system by reference to the level of economic growth of the Brazilian economy, the level of inflation and other economic indicators. The SELIC rate was revised, positively and negatively, during 2011 and was 11.00% as of December 31, 2011.  In 2012, the Central Bank undertook a systematic easing of monetary policy in an effort to stimulate growth.  The SELIC rate was cut to 10.50% on January 18, 2012, to 9.75% on March 7, 2012, to 9.00% on April 18, 2012, to 8.50% on May 30, 2012, and to 7.5% on August 29, 2012, and to 7.25% on October 10, 2012, where it remained as of December 31, 2012.
 
At December 31, 2012, all of our indebtedness was either denominated in reais and subject to Brazilian floating interest rates or subject to currency swaps that are tied to Brazilian floating interest rates, including R$1,987.3 million tied to the Long-Term Interest Rate (Taxa de Juros de Longo Prazo, or TJLP), R$1,787.7 million tied to the Interbank Deposit Certificate Rate (Certificado de Depositário Interbancário, or CDI rate), an interbank certificate of deposit rate that applies to our foreign currency swaps and some of our other real-denominated indebtedness, and R$137.4 million tied to UMIPCA (Índice de Preços ao Consumidor Amplo). At December 31, 2012, R$376.1 (after hedging) of our total consolidated indebtedness was subject to fixed interest rates.   Any increase in the CDI rate or the TJLP rate may have an adverse impact on our financial expenses and our results of operations.
 
Events in other countries may have a negative impact on the Brazilian economy and the market value of our securities.
 
Economic conditions and markets in other countries, including United States, Latin American and other emerging market countries, may affect the Brazilian economy and the market for securities issued by Brazilian companies. Although economic conditions in these countries may differ significantly from those in Brazil, investors’ reactions to developments in these other countries may have an adverse effect on the market value of securities of Brazilian issuers.  Crises in other emerging market countries could dampen investor enthusiasm for securities of Brazilian issuers, including ours, which could adversely affect the market price of our shares and ADSs.
 
In addition, the Brazilian economy is affected by international economic and market conditions generally, especially economic conditions in the United States.  Share prices on the BM&FBOVESPA, the São Paulo Stock Exchange, for example, have historically been sensitive to fluctuations in U.S. interest rates and the behavior of the major U.S. stock indexes. An increase in the interest rates in other countries, especially the United States, may reduce global liquidity and investors’ interest in the Brazilian capital markets, adversely impacting the price of our shares and ADSs.
 
We may be vulnerable to the current disruptions and volatility in the global financial markets.
 
The global financial system has since mid-2007 experienced severe credit and liquidity conditions and disruptions leading to greater volatility.  Since the fall of 2008, global financial markets deteriorated sharply and a number of major foreign financial institutions, including some of the largest global commercial banks, investment banks, mortgage lenders, mortgage guarantors and insurance companies, were experiencing significant difficulties including runs on their deposits and inadequate liquidity.
 
 
In an attempt to increase liquidity in the financial markets and prevent the failure of the financial system, various governments have intervened on an unprecedented scale. Although the global economy has recently been showing signs of recovery there is no assurance that such recovery will continue once the effects of various government stimulus efforts have worn off.  In the long term, as a consequence, global investor confidence will likely remain low and credit will likely remain relatively lacking. Hence, additional volatility in the global financial markets may occur.
 
However, additional volatility in the global financial markets could have a material adverse effect on our ability to access capital and liquidity on acceptable financial terms, and consequently on our operations.  Furthermore, an economic downturn could negatively affect the financial stability of our customers, which could result in a general reduction in business activity and a consequent loss of income for us.
 
Risks Relating to Our Commons Shares and the ADSs
 
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.
 
Judgments seeking to enforce our obligations in respect of our shares or ADSs in Brazil will be payable only in reais.
 
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.
 
Volatility and lack of liquidity in the Brazilian stock market may substantially limit investors’ ability to sell shares at the price and time desired.
 
Investment in securities traded in emerging markets such as Brazil often involves more risk than other world markets, given the track record of economic instability and constant changes.  The Brazilian stock market is significantly smaller, less liquid and more concentrated, compared to the world’s major stock market. At December 31, 2012, BM&FBOVESPA’s market capitalization was approximately R$1.8 trillion (U.S.$873 billion).  The Brazilian capital market shows significant concentration.  The top five shares in terms of trading volume accounted for approximately 43.0% of all shares traded on the BM&FBOVESPA in the year ended December 31, 2012.  These characteristics of the Brazilian capital market may substantially limit the ability of investors to sell shares at the desired price and time, which may materially and adversely affect share prices.
 
Shares eligible for future sale may adversely affect the market value of our shares and ADSs.
 
All of our shareholders have the ability, subject to applicable Brazilian laws and regulations and applicable securities laws in the relevant jurisdictions, to sell our shares and ADSs.  We cannot predict what effect, if any, future sales of our shares or ADSs may have on the market price of our shares or ADSs.  Future sales of substantial amounts of such shares or ADSs, or the perception that such sales could occur, could adversely affect the market prices of our shares or ADSs.
 
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 at a rate of 15%, or 25% if realized by investors resident in a “tax haven” jurisdiction (i.e., a country that does not impose any income tax or that imposes tax at a maximum rate of less than 20%). Although we believe that the ADSs will not fall within the definition of assets located in Brazil for the purposes of Law No. 10,833, considering the general and unclear scope of Law 10,833 and the absence of any judicial guidance in respect thereof, we are unable to predict whether such interpretation will ultimately prevail in the Brazilian courts.  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 of 15% or 25%, depending on the circumstances.  Gains realized through transactions on Brazilian stock exchanges, if carried out in accordance with Resolution 2,689, of January 26, 2000, as amended, or “Resolution CMN 2,689” of the National Monetary Council (Conselho Monetário Nacional CMN, or “CMN”) as described below in “Item 10. Additional Information—E. Taxation—Brazilian Tax Considerations—Taxation of Gains,” are exempt from the Brazilian income tax.  Gains realized through transactions on Brazilian stock exchanges not in accordance with Resolution CMN 2,689 are subject to tax at a rate of 15% and also to withholding income tax at a rate of 0.005% (to offset the tax due on eventual capital gain).  Gains realized through transactions with Brazilian residents or through transactions in Brazil not on the Brazilian stock exchanges and not in accordance with Resolution CMN 2,689 are subject to tax at a rate of 15%, or 25% if realized by investors resident in a tax haven jurisdiction.
 
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, 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 2,689, 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 2,689, 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.
 
If we raise additional capital through an offering of shares, investors’ holdings may be diluted.
 
We may need to raise additional funds through a capital increase, public or private debt financings, or a new share issuance in connection with our business. Any additional capital raised through the issuance of shares or securities convertible into shares conducted on stock exchanges or through public offerings may be made, according to Brazilian law, without preemptive rights for the holders of our shares, which may result in the dilution of our holdings in our share capital.
 
 
A.
History and Development of the Company
 
Basic Information
 
TIM Participações S.A. is a corporation (sociedade anônima) organized under the laws of the Federative Republic of Brazil.  The Company was incorporated on May 22, 1998 under the name Tele Celular Sul Participações S.A., which was later changed to TIM Participações S.A. on August 30, 2004.
 
Our headquarters are located at Avenida das Américas, 3434-7th floor, 22640-102 Rio de Janeiro, Brazil and our telephone number is +55 (21) 4109-3742 and our fax number is +55 (21) 4109-3314.
 
Our agent for service of process in the United States is CT Corporation located at 111 Eighth Avenue, New York, NY 10011.
 
Historical Background
 
Our indirect controlling shareholder, Telecom Italia, began operating in Brazil in 1998 and through us is currently a leading wireless operator in the country.  In the 2001 auctions held by Anatel for Bands D and E, Telecom Italia was the only company to be awarded licenses covering the entirety of the Brazilian territory, which at the time made Telecom Italia the sole operator to offer services on a nationwide level under the same brand.  In 2002, Telecom Italia (then Telecom Italia Mobile) formed TIM Brasil, the holding company of Telecom Italia’s operating companies in Brazil.
 
Prior to the incorporation of Telebrás in 1972, there were more than 900 telecommunications companies operating throughout Brazil.  Between 1972 and 1975, Telebrás, as a regulated monopoly, acquired almost all the telephone companies operating in Brazil.  Beginning in 1995, the Brazilian federal government undertook a comprehensive reform of Brazil’s telecommunications regulatory system.  In 1996 and 1997, the Brazilian government privatized Telebrás and established Anatel as an independent regulatory agency.  In connection with the privatization, Telebrás was broken up (the “Breakup”) into 12 new holding companies (the “New Holding Companies”) that consisted of
 
 
·
eight cellular telecommunications service providers, each operating in one of ten regions (each a “Cellular Region”);
 
 
·
three fixed-line telecommunications service providers, each providing local service and intraregional long distance service in one of three regions (each a “Fixed-Line Region”); and
 
 
 
·
Embratel Participações S.A. — Embratel (“Embratel”), which provides domestic long distance telecommunications service (including intraregional and interregional), as well as international telecommunications service throughout Brazil.
 
Upon the Breakup of the Telebrás System, the Brazilian territory was initially divided by Anatel into ten separate cellular service regions (“Band A”), each serviced by one of the New Holding Companies operating in the cellular telecommunications business.  In addition, under the General Telecommunications Law, the federal government granted authorizations to new companies to provide cellular telecommunications service within a 25 MHz sub-band within the band of 800 to 850 MHz, which is referred to as Band B (“Band B”).  Companies operating under the Band B were distributed throughout ten different regions, which generally overlap with the Band A regions.  Anatel’s rules at the time prevented the controlling shareholders of Band A and Band B cellular service providers from holding more than one license, either in the form of an authorization or a concession, in a single PCS region and as a result, some companies controlled by Telecom Italia waived their rights to provide PCS services in certain areas.
 
In July 1998, the Federal Government sold substantially all its shares of the New Holding Companies, including its shares of Tele Sudeste Celular Participações S.A. (“TSU”) and Tele Nordeste Celular Participações S.A. (“TND”), the two companies that, following a series of acquisitions, corporate reorganizations and corporate name changes, merged to form TIM Participações (“TIM”) in 2004.  In December 2002, TIM Sul, TIM Nordeste Telecomunicações and TIM Maxitel had converted their respective concessions to operate under Cellular Mobile Service (“SMC”) regulations into authorizations to operate under PCS regulations.  We continued to expand and restructure our operations through a series of corporate reorganizations, mergers, acquisitions and name changes, and we are currently held, directly and indirectly, by Telecom Italia through its wholly-owned subsidiary, TIM Brasil.  See “Item 4. Information on the Company—C. Organizational Structure” for a description of our current corporate structure and Exhibit 8.1 attached hereto for a list of our significant subsidiaries as of the date of this annual report.
 
In 2011 our shareholders approved our adherence to the Novo Mercado rules and the transfer of trading of the shares issued by us to the Novo Mercado.  In order to join the Novo Mercado, we entered into a Novo Mercado Participation Agreement with the  BM&FBOVESPA.  Through this agreement, which became effective on July 27, 2011, we are required to adhere to 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 BM&FBOVESPA.  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.  As part of our migration to the Novo Mercado listing segment of the BM&FBOVESPA, 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 BM&FBOVESPA, by using the code “TIMP3” and as from August 5, 2011, our ADSs representing five common shares instead of ten preferred shares commenced trading on the NYSE.  See “Item 9.  The Offer and Listing—A.  Offer and Listing Details.”
 
2012 Important Events
 
2012 mobile market developments
 
According to Anatel, the Brazilian mobile market reached 261.8 million lines nationwide at the end of 2012, corresponding to a penetration ratio of 132.8%, compared to 123.4% in 2011, for an annual growth rate of 8.1%, compared to 19.4% in 2011. Brazil is the fifth largest mobile telephony market in the world, and telephony is currently the most common means of communication in Brazilian households among all social classes. The prepaid customer base at 210.8 million lines continues to represent the greatest share of the total subscriber base, growing 6.4% in 2012 and constituting 80.5% of the mobile market.  The postpaid segment reached 51.0 million lines in 2012, a 15.6% increase over 2011. Growth factors for both sectors include increased access to credit and an expansion of the Brazilian middle class.
 
 
Corporate reorganization of TIM Fiber RJ S.A. and TIM Fiber SP Ltda.
 
On July 8, 2011, our wholly-owned subsidiary TIM Celular entered into an agreement with Companhia Brasiliana de Energia and AES Elpa S.A. (the AES Group in Brazil) for the purchase of all of AES Elpa S.A.’s equity interests in Eletropaulo Telecomunicações Ltda. and 98.3% of the interest of AES Communications Rio de Janeiro S.A. (the “AES Atimus Acquisition”).  We completed the acquisition on October 31, 2011, after all conditions precedent to the contract were completed and certain regulatory approvals were obtained.  We paid a total of R$1,074.2 million and R$447.5 million, respectively, for each of Eletropaulo Telecomunicações Ltda. and AES Communications Rio de Janeiro S.A.  In connection with the acquisition, Eletropaulo Telecomunicações Ltda. changed its corporate name to TIM Fiber SP Ltda., and AES Communications Rio de Janeiro S.A. changed its corporate name to TIM Fiber RJ S.A., and we call this business, which owns and operates an extensive fiber optic network in metropolitan São Paulo and Rio de Janeiro, collectively, TIM Fiber.
 
In accordance with the reorganization of TIM Fiber, on August 29, 2012, TIM Fiber RJ and TIM Fiber SP were merged into TIM Celular. 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.
 
Capital Expenditures
 
In 2012, our Board of Directors approved our budget for capital expenditures, which estimated expenditures of R$3.0 billion for 2012.  We generally seek to budget approximately 12% of our total gross revenues for our capital expenditures.  Most of the capital expenditures we budgeted relate to the expansion of the capacity and quality of our 3G technology and development of technology infrastructure.
 
In 2012, in response to Anatel’s requirements that we enhance the quality of services provided, we committed to make heavy network investments over the next several years.  According to the Network Improvement Plan we presented to Anatel, we anticipate infrastructure investments to reach approximately R$8.2 billion between 2012 and 2014, with a focus on infrastructure and quality improvements, including projects to (i) increase our network, with an anticipated 30% growth in 2G antennas and 24,000 kilometers of new fiber optic cables by 2014, (ii) optimize network utilization, including adjustments for enhancing signal quality in current coverage areas; and (iii) map network interruption and failure causes, in addition to implementing solutions to prevent such events, ensuring the quality of calls and data connections, and increasing users’ accessibility.
 
Our capital expenditures are based on commercial, technical and economic factors such as service rates, service demand, price and availability of equipment.  There is no assurance that our estimates of such commercial, technical and economic factors will prove to be correct, or that we will actually spend our planned capital expenditures in future periods.
 
Our principal capital expenditures in 2012 related to network infrastructure and information technology systems focused on improving the quality of our services.  Other capital expenditures in 2012 related to the acquisition of 4G licenses and the funding of other organic projects focused on the development of our network infrastructure.  Our principle source of funds for capital expenditures is cash from operations.
 
B.
Business Overview
 
Market Characteristics
 
The Brazilian mobile telecommunications market has in recent years been characterized by the expansion of the number of subscribers, investment in network infrastructure and subsidies to attract and retain customers.  These expenditures have resulted in a significant increase in mobile penetration, revenue generation and competition for customers.  As of December 31, 2012, there were approximately 261.8 million mobile lines, representing approximately 132.8% of the population, compared to approximately 242.2 and 202.9 million mobile lines representing approximately 123.9% and 104.7% of the population in 2011 and 2010.
 
Although the industry has benefited from the increased purchasing power of Brazil’s less affluent population, market focus remains on the more affluent cities clustered in the south and southeast of the country.
 
 
As is the case throughout most of Latin America, the Brazilian mobile telecommunications market is characterized by a large number of prepaid customers.  According to Anatel, at the end of 2010, 2011 and 2012, approximately 82.3%, 81.8% and 80.5% respectively, of mobile lines were prepaid and 17.7%, 18.2% and 19.5%, respectively, were postpaid.  The postpaid segment reached 51.0 million lines in 2012, an annual expansion of 15.6%.  The average monthly revenue per mobile customer in Brazil was approximately R$23.6 for the year ended December 31, 2010, R$21.1 for the year ended December 31. 2011 and R$19.8 for the year ended December 31, 2012.
 
Our Business
 
We are the second largest provider of mobile telecommunication services in Brazil based on the number of phone lines, with 70.3 million lines and a market share of 26.9%, based on data from Anatel.  We led the mobile telecommunications market in net additions of lines in 2012 according to Anatel, a result we also achieved in 2011 and 2010.  In the year ended December 31, 2012, we added 6.3 million net lines, an increase of approximately 3% compared to net additions in the year ended December 31, 2011.
 
Through our subsidiaries in various telecommunications markets throughout Brazil, we operate mobile, fixed and long distance telephony, data transmission and Internet services.  For the year ended December 31, 2012, our gross service revenue was R$24.4 billion, a 9.6% increase from the year ended December 31, 2011, following an 21.8% increase in gross service revenue from 2010 to 2011.
 
Through our GSM network, we serve approximately 95% of the urban population of Brazil, representing the largest GSM network coverage of any mobile telecommunications services provider in Brazil (based on publicly available data of other mobile telecommunications providers), with a presence in approximately 3,400 municipalities.  We offer extensive data coverage throughout Brazil, with our general packet radio services technology, or GPRS, covering 100% of our coverage area and our EDGE technology reaching 94% of our coverage area, in addition to our sophisticated 3G network covering more than 72% of the urban population of Brazil. Our international roaming agreements include more than 450 networks available in over 200 countries. Our fiber network extends from northern to southern Brazil, with an extensive wide area network, or backbone, of approximately 39,000 kilometers, and metropolitan area networks, or backhaul.  Our fiber optic network has a unique capacity to offer high quality ultra-broadband service in the Rio de Janeiro and São Paulo metropolitan regions, which together represented 25% of Brazilian GDP and annual telecommunications industry revenues of R$30.0 billion as of December 31, 2011, according to data from IBGE.  We began in 2012 a major metropolitan fiber optic network expansion in 44 major Brazilian cities, which we anticipate will achieve approximately 50% total traffic by the end of 2014. This is a key project that will enable us to provide high performance data services including 4G technology.  In 2012 we also continued to expand upon our long distance fiber optic network, delivering the first stage of the LT Amazonas project, a fiber optic backbone connecting major cities in the north of Brazil, one of Brazil’s regions with the greatest lack of infrastructure.
 
We believe we have a strong brand and a reputation for innovation, having pioneered several product launches in Brazil, such as the introduction of multimedia messaging services, or MMS, and the BlackBerry product line.  Our mobile phone plans, such as Infinity Pré and Liberty, have transformed the mobile telecommunications market in Brazil, in line with our strategy to increase voice traffic and long distance calls in Brazil and to accelerate the growing trend in the substitution of fixed-line telephone services for mobile telephone services.  In addition, according to a marketing research survey of 11,210 mobile telephone users throughout Brazil conducted by Ipsos from November 2012 to January 2013 under an agreement with us, we are recognized as one of the market leaders in terms of brand preference and innovation, among other attributes.
 
Our growth in the mobile telecommunications market does not result in revenue cannibalization (substitution of fixed-line services for mobile services) as we are essentially a pure mobile operator with no landline legacy, unlike many of our competitors that offer both fixed-line and mobile telephony services. Also, we abide by a “no subsidy” policy for handset and accessories sales, which helps avoid pressure on margins and costs as we grow.
 
In 2012, as in 2011 and 2010, we invested more in our infrastructure than any other mobile telecommunications operator in Brazil, based on capital expenditure data reported by our competitors. We believe our net investments of approximately $3.8 billion in 2012, a 10% increase over 2011 and of which approximately 93% went towards infrastructure, is indicative of our commitment to enhancing our ability to provide services of the highest quality and
 
 
respond to the expected increasing demand in voice traffic in Brazil. According to data submitted to Anatel, we will invest more in infrastructure than any other mobile telecommunications operator between 2012 and 2014.
 
As of December 31, 2012, we had more than 10,000 points of sales through premium shops and dealers (exclusive or multi-brand), in addition to relationships we have established through a network of large, established retail chains. In addition to these retail outlets, our customers have access to prepaid phone service as an alternative channel to access our products and services through supermarkets and newsstands and other smaller retailers, for a total of approximately 470,000 points of sale spread throughout Brazil.  This figure includes 131 of our own stores, 50 of which were inaugurated in 2012.
 
Competitive Strengths
 
We believe that our robust network infrastructure, together with our brand recognition and our widespread sales network positions us well to capitalize on opportunities in the telecommunications industry in Brazil and meet the growing demand in the mobile telecommunications market.  We believe our main strengths include:
 
Strong and sustainable revenue and margin growth coupled with leadership in attracting customers. According to a marketing research survey conducted by Ipsos from November 2012 to January  2013, we are viewed as one of the market leaders in terms of brand preference and innovation.  We were also found to have the lowest churn rate among our competitors according to this study.  We had the most net additions in lines among mobile telecommunications providers in Brazil in 2012 according to Anatel, with 6.3 million net additions, reaching a client base of 70.3 million lines at year end.  In 2012, we obtained a 32.0% share of net additions, steady compared to our 32.7% share of net additions in 2011. In the prepaid segment, we achieved 8.8% growth and in the postpaid segment, we achieved 15.5% growth.
 
Our leadership in customer acquisition is the result of factors such as: (1) innovative offerings that we believe have improved benefits to our customers when compared to our competitors, (2) community awareness in Brazil which has, in effect, through “word of mouth,” spread the benefits of our services, (3) superior network infrastructure that we believe allows users to fully enjoy our services, (4) strong brand recognition, and (5) clear and direct communication to our target client base.
 
We expanded our customer base by 25.6% from December 31, 2010 on a pro-forma basis to December 31, 2011, and by 9.7% between December 31, 2011 and December 31, 2012.  During these periods, we increased our net operating revenue by 18.2% and 9.8%, respectively.
 
High quality services. According to Anatel, in 2012 we retained the second position among mobile operators in Anatel’s Customer Care Performance Index.  This result demonstrates our continued commitment to providing our customers with the highest quality service and responding adequately to rising service demand in Brazil.  In 2012 our services were also set apart from other operators as having the fewest customer complaints with PROCON, the Brazilian consumer protection entity.
 
Reinforcing our innovative DNA, in 2012 was debuted an unprecedented and pioneering website we call “Open Doors” which enables anyone on the web to monitor the services provided by us. The site reaffirms our commitment to transparency in the quality of service provided.  Through this site it is possible to learn relevant information about our company, view a detailed coverage map and be updated with news about the telecommunication market.  In the future visitors will be able to browse tutorial videos about the specific services we offer. The “Open Doors” site also brings us in compliance with the action plan submitted to Anatel in enabling anyone to view the commitments we have assumed in order to improve network quality.
 
During 2012, 2013 and 2014, we are expected to consolidate our position as the leading mobile telecommunications operator in infrastructure investments, based on public capital expenditure data reported by other operators.  Such investments have been achieved organically, including through building long distance networks and establishing our metropolitan fiber optic cable network and through increased coverage and capacity (we achieved a 30% increase in volume of TRXs installed and 48% increase in the number of sites connected to fiber in December 2012 compared to December 2012), as well as by means of inorganic growth, for example, though the acquisition of assets such as Intelig and TIM Fiber.
 
 
During the period from December 31, 2011 to December 31, 2012, we increased the capacity of our voice network by 30%, based on installed TRX, which is the network element responsible for adding traffic capacity to an antenna. In this same period, our 3G network coverage grew by more than 45.9% in terms of the number of cities covered, reaching 72% of Brazil’s urban population.
 
The acquisition of Intelig added to our network infrastructure a 100% digital fiber optic network installed from northern to southern Brazil, totaling more than 500,000 kilometers of fiber optic cables, with an extensive wide area network (backbone) of approximately 15,000 kilometers and metropolitan area networks (backhaul) in Brazil’s principal cities. In addition, we added to our network telephone exchanges and satellite stations, connecting to major networks and with capability in major international submarine cable systems.  The AES Atimus Acquisition positions us well, relative to our competitors, to capture broadband Internet market share. In Rio de Janeiro and São Paulo, Brazil’s two largest cities, the AES Atimus (now TIM Fiber) network is capable of reaching almost twice the network size of our competitors in these markets, with a total of 5,500 kilometers of fiber optic cable spread over Rio de Janeiro and São Paulo, available to approximately 550,000 businesses.
 
Strong brand associated with innovation. We believe we have a reputation for innovation, as supported by a survey of the mobile market conducted by Ipsos from November 2012 to January 2013, which found us to be one of the market leaders in Brazil, particularly in terms of brand preference and innovation. We have pioneered the launch of several products and services in Brazil, such as MMS services and BlackBerry handsets.
 
We believe our offering of innovative plans in the Brazilian market has contributed to the increase in voice traffic in Brazil and has been instrumental in positioning us as a service provider capable of establishing the new standard in the market. Among these plans are our Infinity Pré plan in the prepaid segment, which introduced the concept of charging per call (rather than per minute) and equalization of tariffs for local calls and long distance within our network. In the postpaid segment, we launched the concept of unlimited calls within the TIM network with our TIM Liberty plan.  We believe the subsequent development of other plans based on these concepts (Infinity Web – prepaid data; Liberty Web – postpaid data; More Infinity – calls to landlines; and Infinity Torpedo – text messaging) strengthen our leadership position vis-à-vis our competitors in terms of innovation.
 
The only Brazilian telecommunications company listed on the Novo Mercado. Since our listing on the Novo Mercado in July 2011, we are the only company in the Brazilian telecommunications sector listed on this segment of the BM&FBOVESPA.  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 the Telecom Italia Group in Brazil.  We believe listing on the Novo Mercado also aligns the interests among our controlling and minority shareholders with respect to voting rights, tag along rights and dividend policy.
 
In addition, we are the only company in the industry that belongs to a select group of companies comprising the portfolio of the Corporate Governance Index (CGI), the BM&FBOVESPA Tag Along Stock Index (ITAG), and the Carbon Efficient Index (ICO2), comprised of companies that have committed to adopt transparent practices with respect to their emissions of greenhouse gases. We are also part of the portfolio of the Corporate Sustainability Index (ISE) of the BM&FBOVESPA, an index comprised of companies that have a strong commitment to sustainability and social responsibility.
 
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 executives have been nominated for various awards such as “CEO of the Year” by the World Communication Awards in 2010 and as finalists for the Second Business Marketing Leader Award and the Marketing Professionals Award in 2011 by Marketing Magazine. Our executive compensation policy seeks to align the interests of our executives with those of our shareholders, through variable compensation plans and stock options that reward good performance and the accomplishment of certain goals, as well as provide for improved executive retention.
 
Following significant losses in 2008, our controlling shareholder, Telecom Italia, restructured our management, which helped reposition us as the second leading mobile telecommunications in Brazil provider in terms of subscriber lines. 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.
 
Our Strategy
 
Our strategy includes:
 
Strengthening our customer base and improving our network.  The Brazilian mobile telecommunications market has grown significantly in recent years.  We believe that there is still significant opportunity for growth in our user base beyond the estimates reported by Anatel because these estimates do not take into account the existence of multiple lines per user and non-human (machine-to-machine) access, such as points of sale and tracking services that use a GSM SIM card for data communication.
 
Our growth strategy involves strengthening our existing customer base by offering exclusive products to existing customers and by improving the quality of local and long-distance communications within our network. We believe this strategy will allow us to strengthen customer loyalty without requiring us to incur higher costs, as increased traffic within our own network does not cause us to incur interconnection charges.  We are also constantly seeking new customers through new marketing efforts and promotional initiatives.
 
Capitalizing on the acceleration of fixed-mobile substitution.  We seek to capitalize on the opportunity for growth in voice traffic and encourage the use of mobile devices, rather than fixed lines, for long distance communication, through fixed-to-mobile substitution.  We believe that the main advantage of our product offerings is that our users are able to use our network more than that of other mobile telecommunications providers.  Our prepaid “Infinity” plans and postpaid “Liberty” plans were initially developed in 2009 in connection with this strategy and we continue to develop these product offerings, which we view as key drivers to growth.
 
This strategy has been successful in part due to the limited service offerings of other long distance carriers in Brazil and the acceleration of fixed-to-mobile substitution.  We have become the market leader in the long distance telecommunications market based on our market share, which in 2007 amounted to 5.9% and by December 2012 exceeded 50.1%, according to Anatel.  Fixed-to-mobile substitution is increasingly evident in the Brazilian market, as fixed telephony operators have experienced a decline in the number of users and revenue. Since we are primarily a mobile operator with robust network infrastructure, the impact of any reduction in the fixed telephony market does not impact our performance and we therefore encourage the acceleration of fixed-mobile substitution, which in turn increases demand for our services.
 
Providing universal Internet access to our customer base.  We intend to provide universal Internet access to all segments of our customer base, offering our prepaid and postpaid customers competitive data usage plans through wireless handsets or accessories.  Our focus on increased data usage among our customers depends on our ability to effectively manage our handset and accessories sales, with primary focus on models that provide for quality Internet access at a low cost, such as webphones.  Since it is our policy not to subsidize our customers’ purchases of handsets and accessories, this approach has allowed us to offer our services at a highly competitive price, offer convenient payment methods, meet market demand and allow for opportunities for innovation. The result of this strategy can be seen in the increase of 63.1% of gross revenue earned from sales of handsets in the year ended December 31, 2011 compared to the corresponding period in 2010, and in the increase of 19.6% of gross revenue earned from sales of handsets in the year ended December 31, 2012 compared to the corresponding period in 2011.
 
Construction of a unique infrastructure network in the Brazilian market. We are committed to developing a robust network infrastructure capable of serving our expanding customer base and anticipating new trends and technologies in the industry. The development of this infrastructure requires both organic (planning and infrastructure development projects for the existing network) and inorganic (acquisitions) investments.  As part of our strategy to focus our investments in infrastructure, we acquired Intelig in December 2009 to establish our own fiber optic network and develop automation projects and acquired TIM Fiber (formerly AES Atimus) in 2011 to strengthen and expand our fiber optic network.  Our zero-subsidy handset policy further supports our strategy to invest in infrastructure because it frees up capital expenditures for spending on infrastructure. We believe that the implementation of our zero-subsidy policy between 2009 and 2010 has given us a significant competitive advantage
 
 
compared to other mobile telecommunications operators in the marketplace.  We plan to continue to invest in infrastructure in coming years, with an estimated capital expenditures budget for 2012 to 2014 of approximately R$9.5 billion.  We believe the construction of a differentiated network is an effective strategy for sustained growth as evidenced by our leadership position in the provision quality services as measured by Anatel, even our as customer base has grown significantly in the past two years.
 
In 2012, we carried out this strategy through ongoing investments in projects that will continue to differentiate and strengthen our network, such as the construction of new fiber optic networks in the north and northeast of Brazil. Our commitment to providing improved, high-quality services is reflected by our R$3,386 million in investments in 2012, roughly 93% of which were in infrastructure.  Taking into account the acquisition of the 4G licenses, this number would total R$ 3,765 million. The amount invested exceeds by 10% the aggregate investments made in 2011, signaling that the Company is able to satisfy the need for continued investment in a naturally capital intensive sector.  TIM is the Brazilian mobile operator expected to invest more than any other between 2012 and 2014, according to data submitted to Anatel. Our infrastructure investment program is facilitated by our strategy to end handset subsidies and to allocate these savings toward infrastructure improvements.
 
Aligning our business with rising incomes in Brazil. Brazilian demographics have changed substantially in recent years, with the growth in Classes C and D and the increase in average salaries in Brazil.  Because we pioneered the use of unlimited service at a fixed price and we have emphasized increasing the use of voice and data, we believe we have an advantage over our competitors in accessing this demographic shift.  In 2012, our net additions reached 6.3 million lines, or the equivalent of 32.3% of all new lines in the market, with significant concentration in Classes C and D. The volume of unit sales in the same period increased markedly due to the growth of handset and accessory use as an affordable alternative for Internet access for Classes C and D users. As evidence of this trend, mobile Internet devices represented more than half of our total sales in 2012.
 
Expansion into new businesses.  To capture new opportunities for growth in the mobile telecommunications sector goal, we entered into a partnership with the Ministry of Communications to join the National Broadband Program and formed a partnership with the insurance company Porto Seguro to create a Mobile Virtual Network Operator, or MVNO, which is a mobile operator without a proprietary network but which uses the network of other operators and buys minutes, SMS and/or data, among other services, at wholesale prices, paying a discounted price compared to average retail price, or entering into a revenue sharing arrangement.  In addition, with the acquisition of AES Atimus, we believe that we will be able to capture opportunities in the corporate segment with more robust and responsive services.  We also believe we can capture market share in the residential broadband segment, with offerings of high quality ultra-broadband, operating within Rio de Janeiro and São Paulo, markets that accounted for 25% of Brazilian GDP in 2011 and which represent revenue potential of R$30 billion a year.
 
 
Regional Overview
 
We offer GSM telecommunications services with a national reach to 95% of the urban population, which is one of the most extensive GSM coverage areas in Brazil, with a presence in almost 3,400 municipalities.  We also provide extensive data coverage across Brazil using 100% GPRS technology, of which 88% is EDGE technology.  We also have 3G coverage available to approximately 72% of the urban population in Brazil.  The following map shows our coverage areas with the types of service available in each area.
 
 
Through our subsidiaries, we provide mobile telecommunications services using digital technologies, including GSM and 3G, to the areas of Brazil shown in the above map.
 
The following table shows combined information regarding the Brazilian mobile telecommunications market and our customer base, coverage and related matters, at the dates indicated.  Except as otherwise indicated, the amounts presented in the following table are our estimates.
 
   
As of or For the Year Ended December 31,
 
   
2012
   
2011
   
2010
 
Brazilian population (1)
    194.0       195.0       190.8  
Total penetration(2)(3)
    132.8 %     123.9 %     104.7 %
Brazilian subscribers
    261.8       242.2       202.9  
National percentage subscriber growth
    8.1 %     19.4 %     16.7 %
Population we cover(1)
    176.0       184.0       173.0  
Percentage of urban population we cover(4)
    94.7 %     94.4 %     94 %
Total number of our subscribers
    70.3       64.1       51.0  
Our percentage growth in subscribers
    9.8 %     25.6 %     24.1 %
Our percentage of postpaid customers
    15.3 %     17 %     17.7 %
Our ARPU(5)
    20.0       21.4       23.7  

(1)
According to the latest information available from IBGE/IPC Maps.
 
(2)
Percentage of the total population of Brazil using mobile services, equating one mobile line to one subscriber.
 
(3)
Based on information published by Anatel and IBGE/IPC Maps.
 
(4)
Number of people able to access our mobile network, based on Anatel’s coverage criteria.
 
(5)
Average monthly revenue earned per TIM subscriber.
 
 
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 of 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—Rate 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 time of the day, the type of call (for example, calls from other operators on fixed lines or calls outside of the network for cellular 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 segments, 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 number of minutes of use 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 and lower per minute usage charges under a single contract 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 also offer several prepaid plans, none of which include monthly charges.  Prepaid customers can purchase a prepaid credits plan that provides a specific amount of usage time and may receive additional services such as voicemail and caller identification.  In 2012 we expanded our prepaid recharge stations by 17.5%.  There are already over 470 thousand recharge stations nationwide, offering two recharge options: physical (using prepaid cards) and electronic (both online and using a PIN system).  We have agreements with large national retail stores chains, in addition to partnerships with regional retail stores chains, to offer online recharge.  Customers with debit cards that use Banco 24Horas (a network ATMs in Brazil), as well as customers using Visa, MasterCard or Diners Club credit cards can recharge their prepaid phones straight from their mobile handsets.
 
Consumer Plans
 
We have continued to build upon the strength of our leading market position in voice traffic in our product offerings to consumers, focusing on our Infinity and Liberty calling plans which we believe reinforce the strength  of the TIM network by relying on the favorable calling options for the 70.3 million lines within our network.  Within the consumer business, our main plans include:
 
 
 
·
Infinity (prepaid): the costumer is charged per call of unlimited duration to TIM numbers and local fixed telephones; for SMS and mobile internet services, clients are charged for day of use, and services are provided unlimitedly;
 
 
·
Infinity TRI (prepaid in Rio Grande do Sul): costumers from Rio Grande do Sul are charged per day of use for voice (to TIM numbers and local fixed telephones), SMS and mobile internet services;
 
 
·
TIM Beta (prepaid): limited segmented plan addressed to young consumers, charged per day for voice (to TIM numbers), SMS and mobile internet services;
 
 
·
Liberty: for a monthly flat fee, the customer has unlimited talk time with any number on the TIM network, with no restriction on the number or duration of calls.  Also, they may add further advantages to this plan using the Liberty Rádios plan to talk unlimitedly to any radio user (SME), without deduction from its package of minutes;
 
 
·
Liberty Controle: for a fixed rate every month,  the customer has unlimited talk time with any number on the TIM network, and also receives bonuses related to other out of network calls and services; and
 
 
·
Liberty Web Light, Tablet, Modem and Modem Plus: post-paid plans that offer unlimited internet access through dongles and tablets.
 
In 2012, we continued to develop the Infinity and Liberty platforms, adding the Controle plan within the Liberty concept, boosting this segments profitability.  The Controle plan has hybrid characteristics, combining aspects of the Liberty and Infinity plans, giving the customer the convenience of a postpaid plan while allowing customers to control expenses like a prepaid user.  Within the Infinity platform, in 2012 we released the Torcedor program, an innovative approach adapted to the needs of soccer lovers.  In November 2012, we brought further innovation to the Controle segment with Liberty Controle Express, an innovative offer combining Liberty Controle benefits to credit card payment convenience, simplifying new customer adhesions and migration from our prepaid base into this segment.
 
We also recently enhanced our regional offerings in certain areas where we identified greater opportunities for expansion, such as with the launch of the Infinity TRI offering in the state of Rio Grande do Sul.  In an offering that we believe is well-adapted to the culture of this region, we offered new Infinity plans whereby the caller is charged a fixed rate per day of use, rather than per call.  This offering reinforced our commitment to establishing our presence in this region.
 
Throughout 2012, we continued to increase the number of outlets through which our Infinity Pré and Infinity Controle customers can recharge their accounts.  In particular, customers can now recharge their prepaid phones through our website. Also in 2012, given our progress in smartphone penetration, we added another relevant recharge channel,  the “Recargas TIM” android application, allowing Infinity Pré and Controle users to recharge more conveniently.
 
The following presents a brief summary of certain key elements of our Infinity and Liberty consumer plans:
 
 
·
Infinity Pré, which consists of a promotional fixed R$0.25 rate for calls to other TIM users;
 
 
·
Infinity Mais, which charges a fixed R$0.50 rate to landlines;
 
 
·
Infinity Web, which charges a fixed R$0.50 rate for unlimited internet access through cellphone per day of use to Infinity Pré customers;
 
 
·
Infinity Web Modem, which charges a fixed R$1.99 rate for unlimited internet access through dongles and tablets per day of use; and
 
 
·
Infinity Torpedo, which charges a fixed R$0.50 rate for unlimited text messaging (SMS) per day of use;
 
 
 
·
Infinity Zero, a plan without a monthly subscription charge where the customer only pays for monthly utilization and can also rely on Infinity plan benefits, such as charge-per-call, for local and long distance calls using code CSP41;
 
 
·
Liberty+100, which offers competitive subscription rates for SIM-only customers, offering the same benefits as the standard Liberty plans plus 100 minutes for calls outside of the TIM network and unlimited calls for radio users;
 
 
·
TIM Turbo, which has special voice packages for postpaid customers, including the Predileto Local and Predileto DDD packages, which offer unlimited calls to fixed or mobile TIM numbers through a monthly subscription;
 
 
·
Infinity Family, which offers free and unlimited calls between family members all using phones on the TIM network, including calls to TIM Fixo;
 
 
·
Liberty Web Smart, which offers unlimited internet access for a fixed monthly flat fee only if the customer uses the service during the billing month; and
 
 
·
Liberty Torpedo, which offers unlimited SMS to any operator at a fixed monthly rate, only payable in the month used.
 
In 2012, we maintained our SIM-only strategy, where customers may choose discounts in service rather than having the handset purchase subsidized by us.  We believe this allows us to offer differentiated services at competitive prices and make handsets available without providing them to customers for free.
 
Value Added Services
 
We are constantly seeking to increase value to our customers through innovative offers and products, and 2012 was no exception.
 
Infinity Torcedor, a partnership with Mobile Segment Team, provides free content to our clients regarding their favorite Brazilian soccer team (Flamengo, Vasco, São Paulo, Palmeiras, Corinthians, Grêmio, Internacional, Bahia e Vitória), including daily news via SMS, goal scoring alerts, exclusive wallpapers and the team’s official anthem for download.
 
In 2012, we created our own Mobile Learning platform containing the products TIM +Inglês e TIM +Espanhol. These products allow users to learn another language through SMS lessons and a mobile site, making it possible for them to study anywhere and anytime. Each service costs R$0.99 per week and the first seven days of use are free of charge.
 
In the last quarter of 2012, we re-launched the TIM App Shop, a portal containing applications for webphones and smartphones where customers can download free applications and games and also buy paid applications to customize their phones, using their pre-paid credit or their monthly phone bill.
 
In our latest innovative promotion (“Prêmios Grátis Pra Você”), TIM held daily drawings of R$1.000 and two new cars at the end of the contest. More than 13 million customers took part in this promotion, between free users and premium paid users. The premium participants also had a chance to participate in an additional daily drawing of R$5,000 by paying R$0.99. This promotion was even more successful than a similar promotion held in 2011.
 
Business Plans
 
In 2012, we continued to enhance and differentiate our product offerings to our business clients, maintaining an emphasis on simplified service and transparency.  We launched a number of new products and services based on the unique needs of our business clients.  We also maintained our focus on the provision of Internet solutions, providing companies of all sizes with improved, unlimited Internet connectivity.
 
During the year there was a reduction in Liberty Empresa Zero plans and a commensurate growth in Liberty Empresa +50 plans, reflecting our clients’ preference for Combo plans with advantages over minute package plans. 
 
 
We improved our Combo offerings in 2012, focusing on handsets that encourage the use of internet and value added services, such as smartphones, modems and tablets.  Smartphone sales increased substantially in 2012, with Combos holding a strong commercial appeal. We benefited from this trend through our release of entry level Combos, such as Combo FIT, a package including Liberty Empresa +50 with two handset options under a loan for use contract.
 
Also in 2012, we launched tablet Combo offerings, aimed to encourage greater use of our value added services.  Tablet association strengthens our innovative image and creates a strong connection between data services and the TIM brand in consumers’ minds.  Our tablet offers aimed to meet the demands of clients who already had voice access but who needed even more mobile internet resources.  Table offers included Liberty Web Empresa Tablet Plan including the Samsung Galaxy Tab 2 7.0 and the new iPad 16 Gb with exclusive pricing, on some occasions bundled with smartphone offers for even greater market appeal.
 
We continued to aggressively pursue larger companies as potential clients, offering, in addition to customized plan pricing, handset options under loan for use contracts.  In addition to Liberty Empresa plans, we continue to offer Empresa Mundi plans, including packages with 100, 400 and 800 minutes, allowing our clients to talk at the same rate on local calls, national long distance and international long distance calls, offering these clients the option to choose the plan best suited to their needs.
 
In March 2012, we released the Liberty Torpedo plan for the corporate segment, allowing customers to send unlimited SMS to any operator at a fixed monthly rate, only payable in the month it is used.
 
Sources of Revenue
 
Our total gross revenue by category of activity for each of the last three years is set forth below.
 
   
Year ended December 31,
 
 
Category of Activity
 
2012
   
2011
   
2010
 
   
(in millions of R$)
 
Gross mobile telephone services
    24,350.1       22,217.3       18,761.4  
Gross sales of handsets and accessories
    3,405.7       2,540.5       1,557.9  
Total
    27,755.8       24,758.8       20,319.3  

Revenue from mobile telephone services includes revenue from:
 
 
·
monthly subscription charges;
 
 
·
network usage charges for local mobile calls;
 
 
·
roaming fees;
 
 
·
interconnection charges;
 
 
·
national and international long distance calls; and
 
 
·
value-added services, including charges for short message services or text messaging, multimedia messaging services, push-mail, BlackBerry service, video call, turbo mail, WAP downloads, web browsing, business data solutions, songs, games, TV access, voicemail, conference calling, chats and other content and services.
 
We also earn revenues from sales of mobile handsets and accessories.
 
Monthly Subscription Charges
 
We receive a monthly subscription fee under our postpaid mobile plans which varies based on the usage limits under the relevant plan.
 
 
Network Usage Charges
 
We divide our coverage areas into certain areas defined as “home registration areas.”  Calls within the same home registration area are considered local calls.  Each of our customers is registered as a user of one of our home registration areas.
 
As determined by Anatel, our usage rate categories for local mobile services on a prepaid or postpaid basis are as follows:
 
 
·
VC1.  The VC1 rate is our base rate per minute and applies to mobile / fixed calls made by a customer located in the customer’s home registration area to a person registered in the same home registration area.
 
 
·
VC.  The VC rate is our base rate per minute and applies to 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.
 
 
·
AD.  AD is a per-call surcharge applicable to all outgoing calls or incoming calls made or received by a customer while outside such customer’s home registration area.
 
 
·
VU-M.  VU-M 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 of 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 that are outside of 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 party to roaming agreements must provide service to roaming customers on the same basis that such providers provide service to their own clients.  All such providers carry out a monthly reconciliation of roaming charges.  Our roaming agreements have a one-year term and automatically renew for additional one-year terms.
 
Interconnection Charges
 
Interconnection charges represent a significant part of our revenues.  We receive interconnection revenues in connection with any call originating from another service provider’s network, mobile or fixed line, which is received by any mobile customer, of ours or of another provider’s, while using our network.  We charge the service provider from whose network the call originates an interconnection fee for every minute our network is used in connection with the call.  The interconnection fees we charge other service providers became freely negotiable in 2005.
 
We have entered into interconnection agreements with all 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.  Nevertheless, even in the absence of approval by Anatel, the parties to these interconnection agreements are obligated to offer interconnection services to each other.  See “—Regulation of the Brazilian Telecommunications Industry—Interconnection
 
 
Regulation.” The interconnection fees we were permitted to charge other mobile telecommunications providers, and which other mobile telecommunications providers charge us, has in the past frequently been adjusted by inflation.
 
In 2007, an additional agreement relating to interconnection fees entered into among the fixed telephony incumbents (with the exception of Embratel) and the mobile service providers established an average VU-M increase of 2%.  The same parties also executed an additional agreement, which was agreed to by Anatel, contemplating a 68.5% increase in the VU-M fee over the VC-1 adjustment for 2008.  Accordingly, in 2008, mobile also received an average VU-M increase of 2%.
 
In March 2009, there was an agreement between TIM and Embratel (because Embratel did not participate in the previous agreements) to establish the same conditions agreed between TIM and the other incumbents, with the applicable adjustments in terms of financial agreements.  In December, 2009, Anatel determined that we must have only three VU-Ms, according to the three authorization areas (PGA regions).
 
In October 2011, Anatel reduced fixed to mobile rates, which was based on a reduction in the respective wholesale interconnection levels on call termination.  Anatel proposed a reduction of the fixed to mobile rates of 18% in 2012, 12% in 2013 and 10% in 2014, based on nominal declines.  In the future, Anatel intends to establish the reference tariffs for operators with significant market power based on the fully allocated historic costs system, which reference tariffs are already under development by Anatel in consultation with a consortium formed by three companies (Advisia, Analysis Mason and Grant Thornton).  The contract signed in August 2011 between Anatel and the consortium provides for a cost model in the amount of U.S.$8.22 million, to be implemented by 2014, which will likely imply a reduction of the mobile termination rate.
 
Long Distance
 
Telecommunications customers in Brazil are able to select long distance carriers on a per-call basis under the carrier selection, or the CSP program, introduced in July 2003, by punching in a two digit code prior to dialing long distance.  This regulation also increased the size of home registration areas, calls within which are local calls and, as a result, reduced the number of home registration areas.
 
For mobile customers, we offer long distance services throughout Brazil through our wholly-owned subsidiary TIM Celular.  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 or VC rates directly by us only for calls made by and completed to a number registered within that customer’s home registration area.  Long distance calls, however, are charged to a customer by the chosen long distance carrier.  Other long distance carriers, in turn, pay us a VU-M fee for any use of our network for a long distance call.
 
As determined by Anatel, our long distance usage rate categories are as follows:
 
 
·
VC2.  The VC2 rate applies to calls placed by a customer located in one of our home registration areas selecting us as the long distance carrier, on a per-call basis, to place a call to a person registered in another home registration area within the same wireless area recognized by Anatel;
 
 
·
VC3.  The VC3 rate applies to calls placed by a customer located in one of our home registration areas selecting us as the long distance carrier, on a per-call basis, to place a call to a person registered outside the same wireless area recognized by Anatel; and
 
 
·
VU-M.  VU-M is the fee another telecommunications service provider pays us for the use of our network by such provider’s customers, in this case for long distance calls. (See “—Interconnection Charges.”)
 
In 2012, the unification of the licenses 23 and 41 was concluded.  The 23 customer base migrated to 41, thus making possible a single branded long distance operator for both mobile and fixed.  Also in 2012, the Liberty Passport offer for voice and data was launched, which offers customers the innovative concept of unlimited use of
 
 
internet and voice services on five continents, paying a fixed value per day of use of each service (voice or data), simplifying the adhesion to our international roaming service, with extremely attractive values.
 
Value-Added Services
 
We offer, directly or through agreements entered into with third parties, value-added services, including short message services or text messaging, multimedia messaging services, push-mail, video call, turbo mail, WAP downloads, web browsing, business data solutions, songs, games, TV access, voicemail, conference calling, chats and other content to our postpaid and prepaid customers.  We were the first mobile service provider in Brazil to offer subscriptions for BlackBerry service.  Under various postpaid mobile plans some value-added services are included in the monthly subscription charge at a specified level of usage.
 
Value-added services represented 18.1% of our gross service revenues in 2012, 12.8% in 2011, 12.0% in 2010 and 2009, 9.7% in 2008 and 7.9% in 2007.  We continued to experience growth in usage of these services in 2012, as illustrated by revenue growth from value-added services of 39.1% compared to 2011.  We work with Telecom Italia, which makes substantial investment in developing new products, new technology and platforms, to evaluate the value-added services most prized by customers and to reduce implementation problems.
 
The following is a brief summary of our principal value-added services.
 
Short Message Services (“SMS”) or Text Messaging: Since December 2001, through agreements with other providers, we have offered two-way short (or text) message services, allowing our subscribers to send and receive short messages to and from users of networks of other carriers.  Notwithstanding the expectation that other value-added services will begin to generate more revenue, we expect the proportionate contribution of SMS to remain at similar levels, since we believe SMS usage can continue to increase based on the lower usage rates in Brazil compared to Europe and the United States.
 
Multimedia Messaging Service (“MMS”):  As an enhanced version of SMS, MMS allows customers the capability to send, in a single message, multiple color images, sounds and different size text to another mobile phone or e-mail account.
 
Downloads:  We offer personalized ring tones, true tones, screen savers, business data solutions, games and video clips for downloading.
 
Web browsing: Wireless application protocol (“WAP”) is a global standard designed to make Internet services available to mobile telephone users.  WAP allows a micro “browser” in a mobile phone to link into a gateway service in our network enabling users to browse through different pages of information on the Internet.  We currently offer e-mail, data and information services and electronic commerce transactions, to our prepaid and postpaid users.
 
Data transmission:  We also offer general packet radio services (“GPRS”) to our postpaid and prepaid subscribers through our GSM network.  GPRS is a non-voice value-added service that allows information to be sent and received across a mobile network.  GPRS radio resources are used only when users are actually sending or receiving data.  Rather than dedicating a radio channel to a mobile data user for a fixed period of time, the available radio resource can be concurrently shared between several users.  As a result, large numbers of GPRS users can share the same bandwidth and be served from a single cell.  The number of users supported depends on the application being used and how much data is being transferred.  Because of the spectrum efficiency of GPRS, there is less need to build in idle capacity that is only used during peak hours.  GPRS therefore allows us to maximize the use of our network resources.  Our network allows customers with enabled devices to use EDGE technology, which is an evolution of GPRS allowing higher data transmission and a better using experience.  In 2008 we launched 3G services, which is a new technology that enhances the portfolio of value-added services (such as TV channels and speed of downloads).  We believe that 3G is an important milestone in our path towards achieving market leadership.
 
 
Sales of Mobile Handsets and BlackBerry
 
We offer a diverse portfolio of approximately 216 handset models from several manufacturers, including Apple, Nokia, BlackBerry, Samsung, Motorola, Sony, Ericsson and RIM, for sale through our dealer network, which includes our own stores, exclusive franchises, authorized dealers and department stores.  We are focused on offering an array of handsets, including web phones and smartphones such as the iPhone and BlackBerry devices with enhanced functionality for value-added services, including equipment that make 3G, GPRS, EDGE, MMS, MP3, tri-band, infra-red, Bluetooth, browsers, Internet, e-mail and Java available, while reducing reliance on the subsidies for handsets that have characterized the Brazilian market.  Our mobile handsets and BlackBerry can be used in conjunction with either our prepaid or postpaid service plans.  At present, we believe that supplies of mobile handsets and BlackBerry are sufficient to satisfy demand.  See “—Our Network.”
 
Co-Billing Services
 
Co-billing occurs when we bill our customers on behalf of another long distance service provider for services rendered to our customer by that carrier.  Beginning July 2003, we started providing co-billing services to other telecommunication service providers operating in Brazil.  The rates of such services are being negotiated under the supervision of Anatel.
 
Financial Services
 
In 2012, we strengthened our activities in the financial service field through the development of partnerships and products for mobile banking, insurance, mobile payment, and “mobile money,” all of which strengthen our core business and provide additional sources of revenue generation.
 
Mobile Theft Insurance
 
At the beginning of the year, we launched our mobile theft insurance product exclusively through our own stores. In November 2012, we launched our insurance virtual store, an online sales channel. We are the only operator to offer mobile theft insurance through an online sales channel.  This product was developed in partnership with Assurant and allows our customers to protect themselves against the costs of mobile handset theft for monthly prices ranging from R$6.49 to R$18.49.
 
Reward Protection Insurance
 
We entered the low value insurance market targeting classes C and D through the launch of our proteção premiada product in July 2012. This is about a specific insurance offering for our pre-paid clients, which includes reimbursement coverage for funeral expenses up to the value of R$1,000, assistance services to crime victims, and also raffles R$500 per week. The proteção premiada insurance costs R$ 1.50 per month and is debited directly from the clients’ credits.
 
TIM Itaucard
 
The TIM Itaucard is our first payment product, a co-branded credit card in partnership with Itaú, which brings us an unprecedented relationship program based in Itaú's benefits platform. In 2012, our focus was to gain market share through telemarketing efforts.
 
Liberty Controle Express
 
In November 2012, with the idea of creating a postpaid plan that could be sold without the need for a credit assessment, a new Controle plan paid exclusively with a credit card was launched. The plan was launched with three distinct values of R$18.00 for Rio Grande do Sul, and R$28.00 and R$48.00 for the rest of the country. The plan also can be acquired by self-service through our website, in addition to our owned stores.
 
Mobile Money
 
With a focus on developing a product for non-banking prepaid clients, we entered a partnership with the Caixa Econômica Federal and MasterCard to develop new payments options via mobile, in the “mobile money” format, a
 
 
virtual version of a prepaid bank card associated with a mobile number. We hope to launch this product in the second half of 2013.
 
Sales and Marketing
 
We commenced marketing our mobile telecommunications services under the brand “TIM” in March 1999.  We divide our market into three main categories: large business customers (businesses with four or more mobile lines), medium business customers (businesses with fewer than four mobile lines), and individual customers.  These categories are divided further according to level of usage, distinguishing, for example, high-volume users from other categories of usage.  We take these categories into account when developing service plans, sales strategies, customer service strategies and new products, as well as for billing and collection purposes.  We also use market research reports and focus group studies to analyze our customer base.  We refer to this analytical approach to our customer base as “customer segmentation.” Our strategy has been focused on the acquisition and retention of highly valued clients in all segments and on the pursuit of operating efficiency in supporting the expansion of or client base.  We currently intend to reduce our level of promotions and subsidies for handsets and certain prepaid services, and to focus our sales and marketing efforts on postpaid customers, high quality prepaid customers and service plans.  In addition, although there can be no assurance, if we achieve and maintain a clear leadership position in customer satisfaction, we believe we will be well placed and benefit from number portability, recently introduced in Brazil.
 
As of December 31, 2012, our services were marketed through the largest distribution network in Brazil with over 10,000 points of sale (9,296 in 2011), of which approximately 131 were our own stores.  In addition, we had over 470,000 recharging points for prepaid service.  We market our services through a network of stores, including general retail stores that sell our mobile telecommunications services and related goods on a non-exclusive basis, and dedicated outlets that sell our services and goods exclusively.  Sales of our products and services are offered by our sales personnel and also by authorized dealers, who are not our employees.  We select our authorized dealers based on a number of factors including the suitability of the premises in which our services and ancillary merchandise will be offered.  Our personnel and authorized dealers receive ongoing training and marketing support.
 
Our Network
 
Our wireless networks use only digital technologies, primarily GSM, and cover approximately 95% of the urban Brazilian population based on Anatel’s coverage criteria.  During 2010, we started to move away from TDMA technology, migrating customers to the GSM system, promoting greater efficiency in terms of power consumption and discontinuing the use of TDMA in 2011.  During 2008 we implemented 3G services within our network, which enable users to experience a higher level of connectivity with broadband Internet access.  With our acquisition of TIM Celular, we hold authorizations from Anatel to provide our mobile services in each of the ten wireless areas of Brazil over various frequency spectrums.  In December 2010 and in October 2011, we acquired additional bandwidth in the 1,800 MHz band.  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.  Certain 4G coverage commitments will be effective as early as April 2013, which the first coverage commitments for the 450 MHz band are effective by June 2014.  Satisfaction of the these coverage commitments demands heavy capital investments and a commitment to acquire products with national technology.  We view 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 2012, we made R$2,458 million in investments to improve our network infrastructure, primarily in 2G Network and transmission capacity.
 
Our wireless network principally includes transport and computer equipment, as well as exchange, and transmission equipment, consisting primarily of switches, 11,972 BTS in our GSM network and 8,106 B nodes as of December 2012.  The network is connected primarily by IP radio links and fiber optic transmission systems from the recently acquired Intelig network.  The remaining sites are connected by leased lines.  Nokia Siemens Networks, Ericsson and Huawei are our main suppliers for GSM and 3G equipment.
 
In light of the widespread geographic coverage we have already achieved, we are focusing the further expansion and improvement of our GSM network on areas where it is important to increase the quality of our coverage, such as in tunnels, along major roadways, inside buildings in metropolitan areas and in high-traffic areas, such as tourist
 
 
destinations, which typically experience high mobile use.  We also will continue to ensure our network has the capacity to absorb high call volume where relevant.
 
With the acquisition of Intelig, we have integrated more than 15 thousand kilometers of long-distance fiber optic cables connecting the main cities of Brazil.  We have been deploying 40G/DWDM/ROADM (dense wavelength-division multiplexing and reconfigurable optical add-drop multiplexer) layers on top of this existing network, modernizing the existing assets by replacing the legacy network.  In addition, in 2012 we entered into joint construction contracts and other partnerships and initiatives that resulted in the expansion of our fiber optic network by approximately an additional 10 thousand kilometers.  We have also established a partnership with a consortium of electric transmission line operators in the northern region of Brazil, where we acquired the right to launch optical ground wire cables, connecting the cities of Manaus, Macapá and other cities near to the transmission line in 2013.  During the next few years, we plan to execute additional projects to increase the capillarity of our long-distance backbone network.
 
Our switching exchanges and intelligent network platform 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 capacity private service to other carriers and corporate customers.  We also acquired capacity from major submarine cable systems such as AmericasII, Globenet and Atlantis2.  As mentioned above, we have initiated a multi-year plan to expand the Intelig network with a goal of expanding coverage to the most isolated areas of Brazil.
 
Finally, the AES Atimus Acquisition and consequent creation of TIM Fiber has improved our fiber optic network presence in the metropolitan regions of Rio de Janeiro and São Paulo, with a network highlighted by the following characteristics:
 
 
·
presence in 21 cities in the metropolitan regions of Rio de Janeiro and São Paulo;
 
 
·
fiber optic networks using ITU-T g. SMF 652 standards;
 
 
·
5,500 kilometers of fiber optic cabling deployed primarily over electrical utility poles; and
 
 
·
capability to provide connectivity (a “carrier’s carrier”) through the electrical distribution network.
 
Site-Sharing Agreements
 
With the objective of avoiding unnecessary duplication of networks and infrastructures, Anatel permits telecommunications service providers to use other providers’ networks as secondary support in providing telecommunications services.  Therefore, we have allowed other telecommunications service providers to use our infrastructure, and we have used others’ infrastructure, pursuant to site-sharing agreements we have entered into with such providers.
 
Additionally, other sharing plans are being agreed among mobile operators, such as joint construction of long distance lines, backhaul sharing, and even studies for sharing radio access frequencies were made, with focus on lowering costs and increasing the penetration of the wireless services in Brazil.
 
Customer Service
 
We direct our efforts towards maximum customer satisfaction through continuous improvements of processes and systems that facilitate the relationship between us and our customers throughout Brazil.
 
New technologies create new opportunities, and our workforce undergoes regular training as to how to explain our services to new and existing customers. We invest in the simplification of processes at every level, emphasizing the simplification of billing and account processing, projects that allow us to more effectively utilize our workforce, improvements of procedures with a focus on meeting customer demands, improvements in training our consultants and programs to encourage attendance.
 
 
We broadened our focus to include new channels of customer acquisition in 2012, through the development of projects and processes for implementing new channels of contact and enhancing existing channels with a view to meeting customer demands. We opened new customer service channels, such as Portal * 144 # which uses USSD (Unstructed Supplementary Service Data) technology to allow the activation of services from the mobile device itself, as well as reformulation of IVR (Interactive Voice Response), and we continue to refine our automated calling processes which provide services through interactive voice response, enabling client identification and manual selection of options, and recording and reporting through a unique sequential protocol.
 
We are continuously seeking ways to improve our level of customer service.  We constantly monitor and record customer interactions with the company through our proprietary customer monitoring system (“CRM”), which enables us to offer unique and innovative service at multiple points of contact.  In 2012 we further improved upon our CRM system by enhancing customer identification and routing, in addition to existing functionality that does not require the client to repeat a request when that client is transferred to a second operator. These improvements of the computer telephony integration (“CTI”) and CRM systems ensure the transfer of customer data at the time of the call, minimizing the number of calls transferred improperly.
 
Billing and Collection
 
Our company-wide, integrated billing and collection systems are provided by a third-party vendor.  These systems have four main functions:
 
 
·
customer registration;
 
 
·
customer information management;
 
 
·
accounts receivable management; and
 
 
·
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 telephones, currently if a customer’s payment is more than 15 days overdue, we can suspend the customer’s ability to make outgoing calls, and if the payment is 45 days overdue, we can suspend the customer’s ability to receive incoming calls.  After 90 days from the customer’s payment due date, we generally discontinue service entirely, although discontinuation of service is sometimes delayed between 120 and 180 days after the due date for valued customers.  For fixed telephones, if a customer’s payment is more than 30 days overdue, we can suspend the customer’s ability to make outgoing calls, and if the payment is 60 days overdue, we can suspend the customer’s ability to receive incoming calls.  The rules of discontinuation of fixed service are the same as those applied for the mobile service.
 
Pursuant to Anatel regulations, we and other telephone service providers periodically reconcile the interconnection and roaming charges owed among them and settle on a net basis.  See “—Sources of Revenue—Interconnection Charges” and “—Sources of Revenue—Roaming Fees.” Currently, the roaming reconciliation process is largely managed by industry sponsored groups, including Verisign Clearing House for domestic roaming TDMA and MACH for domestic and international GSM, while the interconnection reconciliation process is primarily managed directly by us.
 
Fraud Detection and Prevention
 
“Subscription fraud,” which consists of using identification documents of another individual to obtain mobile services, and “cloning fraud,” which consists of duplicating the mobile signal of a mobile subscriber and thereby allowing the perpetrator to make calls using the subscriber’s signal, are the two principal types of fraud relating to mobile, fixed and long distance service.  Since a substantial majority of our customers use GSM, an entirely digital technology, we experience a low level of “cloning fraud” which is fairly common in parts of Brazil for users of TDMA, CDMA, and other technologies that use analog technology either entirely or in connection with some roaming services.
 
 
We have implemented cloning fraud-prevention measures, including restrictions on the level of international calls, and cloning fraud-detection measures, including review of call records to detect abnormal usage patterns, in an effort to detect fraud as quickly as possible and thereby reduce the associated costs.  We use a nationwide fraud detection system licensed from Hewlett Packard.  This system analyzes various aspects of mobile, fixed and long distance service usage including simultaneous usage by a single customer, call frequency and unusually high usage patterns.
 
As part of our commitment to excellent customer service, in the limited instances in which our customers experience cloning fraud, the customer’s number, mobile telephone or fixed telephone, or both, are changed free of charge.  If subscription fraud has occurred, both the applicable number and the mobile telephone line are terminated.  If part of a fraudulent call is carried by the network of another service provider, we are generally obligated to pay that service provider the applicable interconnection fee, regardless of whether we ever collect the receivable associated with the call.
 
Most of our efforts remain focused on implementing fraud prevention measures in point of sales, including digital authentication for our sales front end system and strong training program as well as monitoring and identification of points of sale.  Customers’ credit history is also being checked during the application process.
 
Competition
 
Mobile Competitors
 
TIM is the brand name under which we market our mobile telecommunications services.  We offer GSM, including 3G, EDGE, and TDMA technology.  Currently, our subsidiaries hold mobile licenses for each of the ten wireless areas of Brazil recognized by Anatel, making us the only mobile operator in Brazil offering nationwide coverage.  In two of our ten areas we are the Telebrás legacy provider.  See “Item 4.  Information on the Company—A. History and Development of the Company—Historical Background.”  Our network covers approximately 94% of the country’s population based on Anatel’s coverage criteria.
 
In addition to TIM, there are three other major participants in the Brazilian mobile market that offer nationwide coverage: Vivo, Claro and Oi.
 
Our principal competitor in Brazil is Vivo, which is controlled by Spain’s Telefónica Móviles and until 2007 was operating in eight of the ten wireless areas of Brazil recognized by Anatel, using TDMA and CDMA, and in 2007 started to use GSM technology in 800 MHz and 1900 MHz and in 2008 started using UMTS in 2100 MHz.
 
In addition, we compete with Oi (the new Telemar brand) and Claro (which is controlled by America Móvil and until 2008 was operating in nine of the ten wireless areas of Brazil recognized by Anatel, using GSM and TDMA technology) in all areas.
 
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 assessed with precision and that 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 fixed line telephone service providers.  The fixed line incumbent providers in Brazil (Oi, Brasil Telecom, Telefónica and Embratel) offer packages of services including voice (both fixed line and mobile), broadband and other services, an approach called “bundling.” Fixed line providers are, however, required to offer their services to unaffiliated mobile providers on the same basis they are offered to affiliated mobile providers.  Our acquisition of Intelig has broadened our participation in the fixed telecommunication sector.
 
On April 27, 2000, Anatel issued Resolution No. 221/00, later superseded by Regulation No. 404 of May 5, 2005, regulating Specialized Mobile Service, or trunking, which is based on push-to-talk technology, with rules similar to the ones applicable to the mobile telecommunications services.  Trunking service providers are not
 
 
permitted to offer their services to individuals, and, therefore, will be competing with us exclusively in the corporate segment of our market.  Nextel has provided trunking services in Brazil since 2001.
 
We also compete in the corporate segment with Nextel, a digital trunking provider which operates under rules similar to the rules applicable to mobile telecommunications service providers, though trunking operators are not permitted to offer their services to individuals.  Nextel has provided trunking services in Brazil since 2001 and, on December 14, 2010, bid R$1.2 billion in winning 12 lots involving new GSM and UMTS frequencies in Anatel’s auction, which will give Nextel the opportunity to be the fifth nationwide mobile telecommunications competitor.
 
Seasonality
 
We have experienced a trend of generating a significantly higher number of new clients and handset sales in the fourth quarter of each year as compared to the other three fiscal quarters.  A number of factors contribute to this trend, including the increased use of retail distribution in which sales volume increases significantly during the year-end holiday shopping season, the timing of new product and service announcements and introductions, and aggressive marketing and promotions in the fourth quarter of each year.
 
Our Operational Contractual Obligations
 
For more information on our material contractual obligations, see “Item 10. Additional Information—C. Material Contracts.”
 
Interconnection 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.  Due to our migration to PCS, we have adapted our interconnection to conform to the new PCS rules and submitted these revised contracts to Anatel.  Nevertheless, even in the absence of approval by Anatel, the parties to these interconnection agreements are obligated to offer interconnection services to each other.  See “—Regulation of the Brazilian Telecommunications Industry—Interconnection Regulation.”
 
Roaming Agreements
 
We have entered into roaming agreements for automatic roaming with other cellular service providers operating outside our Regions.  Automatic roaming permits our clients to use their mobile telephones on the networks of other cellular service providers while traveling or “roaming” in Brazil outside our Regions.  Similarly, we provide cellular telecommunications service to customers of other cellular service providers when those customers place or receive calls while visiting our Regions.  The cellular service providers party to these agreements must provide service to roaming clients on the same basis that they provide service to their own clients and to carry out a monthly reconciliation of roaming charges.
 
Through TIM Brasil, we are a member of the Roaming Management Committee (Associação Brasileira de Recursos em Telecomunicações), a group comprised of all cellular and fixed telecommunications service providers operating in Brazil.  The Roaming Management Committee was created to independently control the activities related to TDMA and CDMA roaming services in Brazil and some international roaming agreements entered into by Brazilian companies with telecommunications service providers operating in the member countries of Mercosul.
 
Our GSM national and international roaming services are supported by individual agreements with our partners.
 
International Roaming Agreements
 
We have international roaming agreements available in 211 different countries on more than 500 networks.  These agreements include at a minimum voice service, and may in many cases be enhanced based on the technology available on the visiting network and may include SMS, MMS, GPRS, EDGE and 3G.
 
 
We were also the first Brazilian mobile operator to launch a user-friendly international roaming plan, charging per day of usage.
 
Site-Sharing Agreement
 
With the objective of avoiding unnecessary duplication of networks and infrastructure, Anatel permits telecommunications service providers to use other providers’ networks as secondary support in providing telecommunications services.  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.
 
Co-billing services
 
Co-billing occurs when we bill one of our customers on behalf of a long distance service provider for services rendered to our customers by that carrier.  Beginning in July 2003, we started providing co-billing services to other telecommunication service providers operating in Brazil.  The rates of such services are being negotiated under the supervision of Anatel.
 
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.
 
In accordance with our Code of Ethics and Conduct, we seek to comply with all applicable laws.
 
Activities relating to Iran
 
We are not to our knowledge engaged in any activities, transactions or dealings with the Government of Iran or that relate in any way to Iran.
 
We are also required to disclose our affiliates’ activities relating to Iran. We have been informed that other members of the Telecom Italia Group have entered into roaming agreements with Iranian telecommunications operators. The information in this section is based solely on information provided to us by our parent Telecom Italia S.p.A. for purposes of complying with our obligations under Section 13(r) of the Exchange Act.
 
Telecom Italia
 
Telecom Italia informs us that the only activities that Telecom Italia has that, to its knowledge, relate in any way to Iran are:
 
 
·
roaming agreements with the following Iran mobile phone operators: Taliya, KFZO —TKC (formerly Payam Kish), Irancell (MTN) and Mobile Company of Iran (MCI) (formerly TCI);

 
·
commercial relationship for the delivery of traffic from Iran to its networks and from its networks to Iran (“International Carrier Agreements”). To this end, its subsidiary Telecom Italia Sparkle S.p.A. (“TI Sparkle”), directly and through its subsidiaries, entered into agreements with Telecommunication Infrastructure Company (TIC) in Iran.

Telecom Argentina
 
Telecom Argentina informs us that the only activities it has that, to its knowledge, relate in any way to Iran are its roaming agreement with MCI.
 
 
Roaming agreements
 
The Telecom Italia Group operates one of the largest mobile networks in Italy. Through its foreign subsidiaries, Telecom Italia also has large mobile operations in Brazil (Tim Participações S.A., by means of its subsidiary TIM Celular S.A.) and Argentina (Telecom Argentina S.A., by means of Telecom Personal S.A.).
 
It is pursuant to roaming agreements that a mobile customer is able to use his or her mobile phone on a network different from such mobile subscriber’s home network. The following is the definition of roaming that we provide in the glossary of this annual report.
 
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.
 
Like all major mobile networks, in response to the competition and customers’ demands, Telecom Italia, Tim Participações S.A. and Telecom Argentina S.A. have entered into roaming agreements with many foreign mobile networks, so as to allow their customers to make and receive calls abroad.
 
Roaming agreements are, including those relating to Iran, on standard terms and conditions. In fact, entering into roaming agreements is an activity carried out in the ordinary course of business by a mobile network operator.
 
Roaming agreements are, generally, reciprocal. Pursuant to a roaming agreement our mobile customers may, when in a foreign country covered by the network (the “Foreign Network”) of an operator with which we have a roaming agreement, make and receive calls on their mobile phone using such operator’s network. Likewise, the Foreign Network’s customers may make and receive calls using our networks when these customers are in Brazil.
 
 The calls made and received by our customers who use the services of the Foreign Network are billed by the Foreign Network to us at the roaming rate agreed upon in the applicable roaming agreement. Then, we will bill our end customers according to the specific tariff plan of the subscription they have signed with us. Likewise, we bill the Foreign Network at the roaming rate agreed upon in the applicable roaming agreement. The Foreign Network will bill its clients for the calls made and received using our networks according to their specific offer to their customer base. Roaming contracts do not, generally, contemplate other fees or disbursements.
 
Telecom Italia informs us that in 2012, the impact on Telecom Italia Group net profit (loss) arising from such roaming contracts is as follows:
 
 
·
its total revenues from roaming agreements with Iranian networks were approximately 330 thousand euros (of which 322 thousand euros were recorded by Telecom Italia S.p.A.);

 
·
its total charges from roaming agreements with Iranian networks were approximately 319 thousand euros (of which 296 thousand euros were recorded by Telecom Italia S.p.A.).

Telecom Argentina informs us that in 2012 the consolidated impact on net profit (loss) arising from Telecom Argentina’s roaming agreements with MCI were as follows:
 
 
·
its total revenues received under roaming agreements with MCI were approximately eleven U.S. dollars;

 
·
its total charges paid under roaming agreements with MCI were approximately three hundred and sixty-nine U.S. dollars.

The purpose of these agreements is to provide coverage in areas where Telecom Italia and Telecom Argentina do not own networks. For that purpose, they intend to continue maintaining these roaming agreements.
 
 
International Carrier Agreements
 
As a rule in the modern telecommunication business, when traffic from a specific network is placed to or transported through another carrier’s network (the “Host Network”), the Host Network receives a fee from the incoming network.
 
Telecom Italia informs us that in 2012, the impact on its net profit (loss) arising from the above mentioned International Carrier Agreements is as follows:
 
 
·
its total revenues from traffic from networks located in Iran to its networks were approximately 9.3 million euros;

 
·
its total charges from traffic to networks in Iran from its networks were approximately 0.4 million euros.
 
 
The purpose of this agreement is to allow exchange of international traffic. Consequently, Telecom Italia intends to continue maintaining this agreement.  
 
 Furthermore, in 2012, Telecom Italia’s subsidiary Olivetti I-Jet, in liquidation, recorded 2,500 euros for the sale of a printer together with the related print heads.
 
All such revenues and charges are de minimis with respect to Telecom Italias consolidated revenues and operating expenses, respectively.
 
Taxes on Telecommunications Goods and Services
 
The costs of telecommunications goods and services to clients are subject to a variety of federal, state and local taxes (in addition to taxes on income), the most significant of which are ICMS, 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 telecommunications goods and services is a state value-added tax, the Imposto sobre Circulação de Mercadorias e Serviços (“ICMS”), which the Brazilian states levy at varying rates on certain revenues arising out of the sale of goods and services, including certain telecommunications services. The ICMS tax rate for domestic telecommunications services is levied at rates between 25% and 35%. The ICMS tax rate levied on the sale of mobile handsets averages 17% or 18% throughout the Regions, to the exception of certain handsets whose manufacturers are granted certain local tax benefits, thereby reducing the rate to as much as 7%. In 2005, certain of the Brazilian states started to charge ICMS on the sale of mobile handsets under a “tax replacement” system, under which the taxpayer that manufactures the goods is required to anticipate and pay ICMS amounts that would otherwise only become due in later steps of the distribution chain. In May 2005, the states decided, with the exception of the state of Alagoas and the Federal District, that as from January 2006, the telecommunications companies should issue invoices of communications services (Model 22) corresponding to the value of tax due on the sale of calling cards to dealers or final customers. The amount of ICMS tax due in such transactions is passed on to the dealers or final consumers and must be paid for the state where the services (the activation of the card) are provided.
 
 
·
COFINS.  The Contribuição Social para o Financiamento da Seguridade Social (“COFINS”) is a social contribution levied on gross revenues (financial revenues are levied at the rate of 0% due to Decree n. 5,442/2005 if the company is taxed in the non-cumulative method or if it applies both methods). Since January 1, 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, making this tax noncumulative, raising the rate to 7.6% for certain transactions, except in connection with, among others, telecommunications services, for which the method continues on a cumulative basis at a rate of 3%.
 
 
·
PIS.  The Programa de Integração Social (“PIS”) is another social contribution levied at the rate of 0.65%, on gross revenues from telecommunications service activities. In December 2002, Law No. 10,637 was enacted, making such contribution non-cumulative and increasing the rate to 1.65% on gross revenues
 
 
 
 
(financial revenues are levied at the rate of 0% due to Decree No. 5,442/2005 if the company is taxed in the non-cumulative method or if it applies both methods), except in connection with telecommunications services, for which the method continues on a cumulative basis at a rate of 0.65%.
 
 
·
FUST.  On August 17, 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 reimburse a portion of the costs incurred by telecommunications service providers to meet the universal service targets required by Anatel (such as targets for rural and impoverished areas, schools, libraries and hospitals), in case these costs are not entirely recovered through the collection of telecommunications service fees and charges.  FUST tax is imposed at a rate of 1% on gross operating revenues, net of discounts, ICMS, PIS and COFINS, and its cost may not be passed on to clients. Telecommunications companies can draw from the FUST to meet the universal service targets required by Anatel.
 
On December 15, 2005, Anatel enacted ordinance No. 7/05 requiring that FUST should be paid on revenues arising from interconnection charges since its effectiveness. A notice was issued deciding that we must adjust values on the FUST calculation basis in order to include interconnection revenues received from other telecommunications companies. A writ of mandamus was filed against Anatel to avoid the terms of ordinance No. 7/05. The first level decision was issued in our favor. Such decision was challenged by ANATEL and the Appeal will still be judged by second level.
 
 
·
FUNTTEL.  On November 28, 2000, the Brazilian government created the Fundo para Desenvolvimento Tecnológico das Telecomunicações (“FUNTTEL”), a fund that is supported by a social contribution tax applicable to all telecommunications services. FUNTTEL is a fund managed by BNDES and FINEP, government research and development agencies. The purpose of FUNTTEL is to promote the development of telecommunications technology in Brazil and to improve competition in the industry by financing research and development in the area of telecommunications technology.  FUNTTEL Tax is imposed at a rate of 0.5% on gross operating revenues, net of discount, ICMS, PIS and COFINS, and its cost may not be passed on to clients.
 
 
·
FISTEL.  The Fundo de Fiscalização das Telecomunicações (“FISTEL”) is a fund supported by a tax applicable to telecommunications services, which was established in 1966 to provide financial resources to the Brazilian government for its regulation and inspection of the sector. FISTEL consists of two types of fees: (1) an installation inspection fee assessed on telecommunications stations upon the issuance of their authorization certificates, as well as every time a new mobile number is activated, and (2) an annual operations inspection fee that is based on the number of authorized stations in operation, as well as the total basis of mobile numbers at the end of the previous calendar year. The amount of the installation inspection fee is a fixed value, depending  on the kind of equipment installed in the authorized telecommunication station. Effective April 2001, the installation and inspection fee is assessed based on net activations of mobile numbers (that is, the number of new cellular 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.
 
 
·
CONDECINE. (Contribuição para o Desenvolvimento da Indústria Nacional) is a social contribution instituted to encourage development of the Brazilian film industry, established by Provisional Executive Order No. 2,228-1/2001, modified by Law No. 12,485/2011. It is levied on telecommunication services that distribute audio-visual contents. CONDECINE is payable by telecommunication companies annually with payment due by March 31 of each year .  The Government justified the creation of CONDECINE tax based on the decrease of the TFF rate of 33%, so the companies will not have a higher tax burden.  Instead, companies will contribute at the same aggregate rate, but to different funds. The calculation base is the same as TFF.
 
 
·
Corporate Income tax and Social Contribution on net income. Income tax expense is made up of two components, a corporate income tax (“IRPJ”) on taxable income and a social contribution tax on net income (“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 exceeds 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.
 
Companies are taxed based on their worldwide income rather than on income produced solely in Brazil. As a result, profits, capital gains and other income obtained abroad by Brazilian entities are added to their net profits for tax purposes. In addition, profits, capital gains and other income obtained by foreign branches or income obtained from subsidiaries or foreign corporations controlled by a Brazilian entity are computed in the calculation of an entity’s profits, in proportion to its participation in such foreign companies’ capital. At first, Brazilian  entities are allowed to deduct income tax paid abroad, up to the amount of Brazilian income taxes imposed on such income (reciprocity of treatment between Brazil and the country from which the income or gain comes from is required in order for this rule to apply). Effective January 1, 2002, profits (including retained profits from previous years) realized by a Brazilian entity from controlled or affiliated companies are taxed as of the date of the Brazilian entity’s year-end balance sheet, unless the Brazilian entity is liquidated before the date of its year-end balance sheet, in which case the profits are taxed at the time of its liquidation.
 
Prior to January 1, 2002, profits realized by an entity in Brazil from a branch or agency were taxed as of the date of the Brazilian entity’s year-end balance sheet, and profits from a controlled or affiliated company were taxed as of the date such amounts were paid or made available to the Brazilian company as dividends or otherwise.
 
Dividends are not subject to withholding income tax when paid. However, as the payment of dividends is not tax deductible for the company that is distributing them, there is an alternative regime for stockholder compensation called “interest on equity,” which allows companies to deduct any interest paid to stockholders from net profits for tax purposes.
 
These distributions may be paid in cash. The interest is calculated in accordance with daily pro rata variation of the Brazilian government’s long term interest rate - TJLP, as determined by the Central Bank from time to time, and cannot exceed the greater of: (1) 50% of the net income (before taxes and already considering the deduction of the own interest amount attributable to stockholders) related to the period in respect of which the payment is made; or (2) 50% of the sum retained profits and profits reserves as of the date of the beginning of the period in respect of which the payment is made.
 
Any payment of interest to stockholders is subject to withholding income tax at the rate of 15%, or 25% in the case of a stockholder who is domiciled in a tax haven. These payments may be qualified, at their net value, as part of any mandatory dividend.
 
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.
 
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 the Communications. Anatel is responsible for promulgating standards related to telecommunications services and regulating the relationship between different operators, as set forth in the General Law of Telecommunications (Lei Geral de Telecomunicações),  Law No. 9,472, dated July 16, 1997 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.
 
 
Regarding the operating activities of TIM, Intelig and TIM Fiber, Anatel has developed a strict regulation of mobile communications services known as Personal Communication Service (Serviço Móvel Pessoal), or PCS, land line services known as Commuted Fixed Telephonic Service (Serviço Telefônico Fixo Comutado), or STFC and data communication known as Multimedia Service of Communication (Serviço de Comunicação Multimedia), or SCM.
 
Anatel may regularly alter these standards based on changes in technology, in particular regarding PCS technology, which are common to the telecommunications sector. In order to allow operators to plan for the implementation of these policies, Anatel approved a General Plan of Update of Telecommunications Regulation in Brazil (Plano Geral para Atualização da Regulamentação das Telecomunicações no Brasil), or PGR, pursuant to which it established short-, medium-, and long-term policies for two, five, and ten-year terms, respectively.  Anatel has authority to propose and to issue regulations that are legally binding on telecommunications service providers.  Any proposed regulation or action by Anatel is subject to a period of public comment, which may include public hearings, and may be challenged in Brazilian courts. This regulation process takes into consideration Anatel’s specialized analysis of different areas of the telecommunication sector and matters resulting from public hearings, by means of which the regulation proposals are considered by Anatel, state authorities and the general public.  We follow these public hearings closely.
 
A presidential decree issued on June 30, 2011, established a bidding process for fourth generation radio frequencies, an important landmarks for the telecommunications sector. The notice to bidders is published by means of a public hearing and determined broadband quality goals, resulting in two new regulations to measure mobile and fixed broadband quality standards: the first one to review of PCS quality standards and a new one to introduce SCM measurement.  These standards are currently being implemented by Anatel and a group of interested companies. The full adaptation of these standards will require new investments.
 
Authorizations and Concessions
 
With the privatization of the Telebrás system and pursuant to the Lei Mínima (the “Minimum Law”), Band A and Band B service providers were granted concessions under SMC or Serviço Móvel Celular (“Cellular Mobile Service”) regulations.  Each concession was a specific grant of authority to supply cellular telecommunications services in a defined geographical area, subject to certain requirements contained in the applicable list of obligations attached to each concession.
 
Through resolutions enacted in September 2000 and January 2001, Anatel launched the PCS regime, and began encouraging cellular service providers operating under SMC regulations to convert their concessions into authorizations under PCS regulations.  According to the rules issued by Anatel, SMC providers would not be able to renew their concessions to provide SMC services, and were compelled to convert to the PCS regime in order to continue their operations.  The permission from Anatel to transfer the control of these companies was also conditioned on rules that compelled SMC providers to migrate its SMC concessions to PCS authorizations, and to operate under the PCS regulations.
 
In 1997 and 1998, 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 following the original expiration dates of the concessions.  TIM Celular 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.
 
On May 30, 2011, we entered into two new radiofrequency terms, formalizing the acquisition of excess radiofrequency in the states of Minas Gerais, Paraná, Santa Catarina, Amapá, Roraima, Pará, Amazonas and Maranhão and those new terms expire in April 2023.
 
In October 2012, we acquired the 2,530-2,540 MHz and 2,650-2,660 MHz sub-bands, with national coverage, and the 450 MHz band in Espírito Santo, Paraná, Rio de Janeiro and Santa Catarina states (the 450 MHz band was jointly acquired with Intelig).
 
The STFC and SCM authorization terms do not have an expiration date.
 
 
The following table shows each of TIM Celular’s PCS authorizations in effect on December 31, 2012.
 
   
Expiration date
 
Territory
 
 
450 MHz
 
800 MHz, 900 MHz and 1.800 MHz
 
Additional Frequencies 1800 MHz
 
1900 MHz and 2100 MHz (3G)
 
2500 MHz V1 Band (4G)
 
2500 MHz P Band** (4G)
States of Amapá, Roraima, Pará, Amazonas and Maranhão
 
 
March, 2016
 
April, 2023
 
April, 2023
 
October, 2027
 
AM – September, 2014
 PA – February, 2024*
States of Rio de Janeiro and Espírito Santo
 
October, 2027
 
March, 2016
 
 
April, 2023
 
October, 2027
 
RJ – February, 2024*
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, 2016
 
 
April, 2023
 
October, 2027
 
DF – February, 2024*
State of São Paulo
 
 
March, 2016
 
 
April, 2023
 
October, 2027
 
State of Paraná (except for the cities of Londrina and Tamarana)
 
October, 2027
 
September, 2022*
 
April, 2023
 
April, 2023
 
October, 2027
 
February, 2024*
State of Santa Catarina
 
October, 2027
 
September, 2023*
 
April, 2023
 
April, 2023
 
October, 2027
 
City of Pelotas and its surrounding region in the State of Rio Grande do Sul
 
 
April, 2024*
 
 
April, 2023
 
October, 2027
 
State of Pernambuco
 
 
May, 2024*
 
 
April, 2023
 
October, 2027
 
State of Ceará
 
 
November, 2023*
 
 
April, 2023
 
October, 2027
 
State of Paraíba
 
 
December, 2023*
 
 
April, 2023
 
October, 2027
 
State of Rio Grande do Norte
 
 
December, 2023*
 
 
April, 2023
 
October, 2027
 
State of Alagoas
 
 
December, 2023*
 
 
April, 2023
 
October, 2027
 
State of Piauí
 
 
March, 2024*
 
 
April, 2023
 
October, 2027
 
State of Minas Gerais (except for the cities in sector 3 of PGO for radiofrequencies of 3G and excess radiofrequencies)
 
 
April, 2013
 
April, 2023
 
April, 2023
 
October, 2027
 
February, 2015
States of Bahia and Sergipe
 
 
August, 2027*
 
 
April, 2023
 
October, 2027
 
 
* Terms already renewed for 15 years and therefore not entitled to another renewal period
 
According to the General Telecommunications Law and regulations issued by Anatel thereunder, licenses to provide telecommunications services are granted either under the public regime, by means of a concession or a permission, or under the private regime, by means of an authorization.  Only STFC incumbents are currently operating under the public regime.  All the other telecommunications services providers in Brazil are currently operating under the private regime, including all the PCS services providers.
 
 
Telecommunications services providers under the private regime are classified as either providing a service of collective interest or restricted interest.  Collective interest private regime services are subject to requirements imposed by Anatel under their authorizations and the General Telecommunications Law.  Restricted interest private regime services are subject to fewer requirements than public regime or collective interest private regime services.  According to the General Telecommunications Law and the regulation thereunder, all the PCS services providers in Brazil operate under the collective interest private regime.
 
In August 2009, Anatel gave its approval for the acquisition of the fixed line operator Intelig, which operates as a local, national and international long distance operator in Brazil and provides fixed broadband service in a number of regions in Brazil.  According to the regulations, TIM Brasil and Intelig were obliged to resolve the overlapping of their fixed service authorizations, keeping only one authorization per class of service.  From July 2012, local fixed telephone service will be provided by Intelig and the national and international long distance telephone service will be provided by TIM Celular, under the selection code 41.
 
In July 2011, TIM Celular acquired from the Companhia Brasiliana de Energia and AES Elpa S.A., its interest in Eletropaulo Telecommunications Ltda. (100%) and AES Communications Rio de Janeiro S.A. (98.3%) (together, “AES Atimus,” now named TIM Fiber).  The contract was signed on July 8, 2011.  On October 31, 2011, after all conditions set forth by the relevant regulatory agency were fulfilled, the transaction was completed.  With these new acquisitions, TIM Celular not only significantly expanded its operations in the data communications segment, or SCM, in the urban areas of the states of Rio de Janeiro and São Paulo, but also obtained important synergies related to the acquired fiber optic network.
 
National Broadband Program
 
In May 2010, the Brazilian government approved a National Broadband Program to extend national broadband coverage by 2014.  The plan includes the reactivation of Telebrás, which is responsible for managing and operating a national fiber optic network, and a new framework aimed at reducing the wholesale connectivity price and consequently allowing a more affordable price of “entry level” broadband residential connections.
 
Other measures included in the plan are represented by fiscal incentives to induce the operators to offer broadband access to low income families, public investments in research and financial support to national industries.
 
Following a scheduled review of the program, a price decrease and a 100% coverage requirement for Public Schools are under discussion and will probably be added to the plan over the next few years.
 
Obligations of Telecommunications Companies
 
In November 1999, Anatel and the Brazilian mobile service providers jointly adopted a Protocol for Mobile Cellular Service Providers (the Protocol).  The Protocol established additional quality of service targets and rates, which SMC operators were required to achieve by June 2001.  Although the General Telecommunications Law does not specify any penalties for failing to meet the targets required by the Protocol, Anatel was required to examine the performance of the Brazilian telecommunications companies under the Protocol’s standards.  Despite migration to PCS in December 2002, from January to June 2003, we reported to Anatel regarding, and had complied with, all quality of service indicators applicable to SMC operators. The Protocol ceased to be applicable to TIM Sul, TIM Nordeste Telecomunicações and TIM Maxitel after July 2003.
 
Beginning in September 2003, we became subject to the PCS quality of service indicators.  Our quality of service obligations under our PCS authorizations differ substantially from those under the previous SMC concessions.  See “—PCS Regulation.”  Since December 2003, we have achieved the majority of the service of quality requirements applicable to the PCS service operators.  Some of our PCS quality of service indicators are currently difficult to achieve due to, for example, our dependence on the performance of third parties and the continuing clarification of some of the quality of service measurements under the PCS rules.  As a result, since 2004 Anatel has been filing administrative proceedings against TIM Celular and TIM Nordeste for non-compliance with certain of our quality of service obligations.  In some of these proceedings, Anatel applied a fee that did not cause a material adverse effect on our business, financial condition and results of operations.  We will continue to strive to meet all of our quality of service obligations under the PCS authorizations.
 
 
In 2011, Anatel published Resolution No. 575/11 to Review of the Regulation on the Management of Quality of Service – PCS.  The new regulation established new quality goals, evaluation criteria, data collection and quality monitoring of Service Providers – PCS.  The Anatel regulation aims to create a comprehensive model of quality management of the PCS providers providing preventive and proactive on the part of the Agency, through the incorporation of indicators and benchmarks that allow the systematic evaluation of the quality of service in all its dimensions.
 
This new list of proposals for quality indicators is divided into two major groups: Operational Indicators and Indicators Research for measuring the quality of service perceived by the user.
 
PCS Regulation
 
In September 2000, Anatel promulgated regulations regarding PCS wireless telecommunications services that are significantly different from the ones applicable to cellular companies operating under Band A and Band B.  The new rules allow companies to provide wireless telecommunications services under PCS authorizations.  The PCS authorizations allow new entrants in the Brazilian telecommunications market to compete with existing telecommunications service providers.
 
According to rules issued by Anatel, renewal of a concession to provide cellular 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 Telecomunicações and TIM Maxitel converted their cellular concessions into PCS authorizations in December 2002, and later transferred them to TIM Sul, TIM Nordeste Telecomunicações and TIM Maxitel, which are now TIM Celular subject to obligations under the PCS regulations.  See “—Authorizations and Concessions.”
 
Anatel has initiated administrative proceedings against TIM Celular for noncompliance with certain quality standards and noncompliance with the rules and the 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, financial condition and results of operations.  In the year ended December 31, 2012, the total amount of these fines was R$181,598,056. However, only R$44,792,205 were classified as “probable loss” by our legal advisors.  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.”
 
According to the new PCS regulations, we are required to adjust our operating processes and agreements to such new rules, including our interconnection agreements, as well as agreements with our customers.  By April 2005, substantially all of our interconnection arrangements were covered by agreements that had been amended to reflect the PCS regulations.
 
In August 2007, Anatel issued Resolution No. 477 establishing new obligations regarding PCS, in particular in connection with users’ rights towards their mobile services providers.  The new resolution came into effect in February 2008.  The main PCS new regulatory obligations include the following:
 
 
·
Creating at least one customer service department for each municipality division;
 
 
·
Increasing prepaid card terms (from 90 days to at least 180 days);
 
 
·
Reimbursing prepaid credits;
 
 
·
Supplying a protocol number for each communication with a customer;
 
 
·
Sending such protocol number by SMS;
 
 
·
Cancelling service in every customer’s service channel of the Company;
 
 
 
·
Cancelling service in 24 hours;
 
 
·
Sending free prepaid card detailed report of service use;
 
 
·
Changing rules for scheduled billing of postpaid customers;
 
 
·
Ceasing to impose fines on customers based on breach of loyalty plans; and
 
 
·
Taking measures to prevent SMS spamming.
 
In October 2012, Anatel enacted the Regulation on Universal Obligations related to the fixed line universal service obligations (Plano Geral de Metas de Universalização), or PGMU, regulatory backhauling, public pay phones and telephone services for families with low incomes, among others.  In November 2012, Anatel enacted the Regulation on Competition Plan (Plano Geral de Metas de Competição), to encourage competition through the interconnection obligation and the use of infrastructure already installed by other operators.
 
Significant Market Power
 
In September 2011, a new competition framework was published by Anatel, the General Plan for Competition Goals (Plano Geral de Metas de Competição, or the “PGMC”).  New rules pursuant to the PGMC were published by Anatel as Resolution No. 600 on November 12, 2012 and implemented on November 26, 2012.  Also in November 2012, Anatel published certain acts identifying groups with significant market power (SMPs) in the following relevant markets as defined by the PGMC: (i) Copper Pair or Coaxial Cable Data Transmission Access Landline Network Infrastructure Offer at Transmission Rates up to 10 Mbps (Act no. 6.617, of November 8, 2012); (ii) Wholesale Local Transport and Long Distance Inland Network Infrastructure Offer for Data Transmission Rates of 34 Mbps or less (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 Inbound Calls (Act no. 6.621, of November 8, 2012); and (v) National Roaming (Act no. 6.622, of November 8, 2012).
 
The TIM Group, comprised of TIM Celular and Intelig, is presented as an SMP in the following markets: (i) Passive Infrastructure in transport and access networks (provision of towers); (ii) Mobile Network Inbound Calls; and (iii) National Roaming.
 
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” promulgated by Anatel in 2005.
 
The free negotiation process for interconnection charges has been extended and will proceed until a “cost based” reference interconnection value is set by Anatel.  Under a specific Resolution, Anatel developed a new model to determine reference costs for the use of mobile networks by providers who have Significant Market Power.  These values will be used in arbitration cases involving termination rates by Anatel.
 
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 – 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 (Exploração Industrial De Linha Dedicada – “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.
 
Anatel conducted a public consultation in March 2011 regarding a proposal to modify the regulation on leased lines, which is a service contract between a provider and a customer, whereby the provider agrees to deliver a symmetric telecommunications line connecting two or more locations in exchange for a monthly rent.  The proposed rule provides for more efficient wholesale service regulation, taking into account the operational needs of alternative market players.
 
 
In October 2011, Anatel established a mechanism for reducing fixed-to-mobile call rates, applying a reduction of 18% in 2012 and 12% in 2013. In November 2012, Anatel decided that the VU-M in 2014 would be 75% of the valid VU-M in 2013, and in 2015 it would be 50% of the valid VU-M in 2013.
 
Besides the VU-M reduction, Anatel established a Bill & Keep (B&K) between SMP and non-SMP PCSs. From January 2013 until February 2015, the B&K will be 80%/20%. From 2015 until 2016 the B&K will be 60%/40%. After 2016 the VU-M will be charged by the SMP whenever their network is used to originate or to finish a call.
 
Rate 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 IST (Índice de Serviços de Telecomunicações), a general price inflation index developed by FGV, in evaluating prices and determining the relevant cap for prices charged in the telecommunications industry. Beginning in 2012, we expect Anatel to begin to assess prices in the telecommunications industry based on a model that takes into account the costs of a hypothetical company costs, along with other factors. 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.  If this new inflation adjustment mechanism, or any other mechanism chosen by the Brazilian government in the future, does not adequately reflect the true effect of inflation on our prices, our results of operations could be adversely affected.
 
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 customer changes services provider within the same Registration Area as well as when 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 access 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 services through our network.
 
The Brazilian Congress is considering bill number 2,126/2011, known as the Legal Framework for the Use of the Internet (Marco Civil da Internet), that would establish warranties, principles, rights and duties related to Internet use and its provision. The project aims to develop regulations related to this service with a general framework. Among key issues addressed in the legislation are: net neutrality, responsibility for damages caused by content generated or published by third parties, content storage and connections.  This law is also intended to develop guidelines for how the government can or should act to provide and monitor Internet service.  The law still needs to be analyzed by the Special Commission and, if approved, will be voted on by Congress.
 
Anatel has previously expressed itself as competent to regulate network neutrality, as has been observed in their analysis of the request for approval for the acquisition of Brasil Telecom by Oi, in which a neutral treatment of the network was imposed. Furthermore, in the SCM Regulation proposal, submitted to Public Consultation, in 2011, the regulation of network neutrality was inserted, forbidding the blockage and discriminatory treatment of traffic, except for the procedures shown as essential for the safety and stability of the service and its supporting networks. Anatel, however, has not yet published this regulation.
 
 
Frequencies and Spectrum Background
 
We have a license to operate PCS services in the 450 MHz, 800 MHz, 900 MHz, 1.8 GHz and 1.9/2.1 GHz and 2.5 Ghz frequency ranges, which allows us to provide mobile communications services with 2G, 3G and 4G technologies throughout Brazil.
 
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.
 
In December 2007, we acquired new authorizations for the 1800 MHz frequency in the São Paulo and Rio de Janeiro in order to improve its radio frequency capacity in these regions.  Within the same auction, Claro and Vivo acquired authorizations to provide PCS services in regions where we historically provide services but where Claro and Vivo previously did not, using 1800 MHz and 1900 MHz bands, which has 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 1800 MHz (band M in the whole state and band E in the state’s countryside).
 
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.
 
 
·
Of the 12 available lots in the H Band, 10 were awarded to Nextel, a new entrant in the GSM market, which has traditionally offered trunking services in Brazil.  Current operators were prevented from participating due to spectrum caps.  Oi and CTBC managed to win the remaining two lots where they had cap availability.
 
 
·
The new entrant will be benefited with spectrum and infrastructure sharing, specifically in locations with less than 30,000 inhabitants, subjected to commercial agreements.
 
 
·
TIM won individual block of frequencies in five service areas, strengthening its presence in the North, Santa Catarina, Minas Gerais and Parana, biding a total of R$81.8 million, which will be paid proportionately to the remaining years in the existing authorization licenses (remaining years/15).
 
 
·
VIVO won blocks in 900 MHz and due to available cap, managed to win lots of 1700/1800 MHz in all regions, completing a national coverage of (10+10) MHz in this band.
 
 
·
Claro won blocks of spectrum in the 1700/1800 MHz band.
 
In December 2011, Anatel started auction No. 001/2011-PVCP/SPV, pursuant to which 16 blocks in the 1,800 MHz band were sold to Claro, Oi, CTBC and TIM.  As a result of our participation in the auction, we will expand our 2G coverage and increase our presence in the northern and midwestern regions of Brazil, including the states of Paraná, Espirito Santo, Rio Grande do Sul, Santa Catarina and Minas Gerais. The necessary authorizations remain pending due to an appeal challenging the bidding process outcome.
 
In 2012, Anatel established a bidding process in order to comply with Presidential Decree n°7.512 of June 2011, which set April 2012 as the deadline to auction the 2.5GHz band, in order to introduce 4G technology in Brazil.  Anatel modeled the auction with 2 national blocks of (20+20)MHz (W and Z) and 2 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.  By April 30, 2013, the Confederations Cup host cities (Belo Horizonte, Fortaleza, Rio de Janeiro, Recife, Salvador and Brasília), in preparation for hosting the 2014 World Cup and 2016 Olympics, should be served by 4G.  Following the results of the auction in October 2012, TIM acquired for R$340 million the 2,530-2,540 MHz and 2,650-2,660 MHz sub-bands, with national coverage, and the 450 MHz band in Espírito Santo, Paraná, Rio de Janeiro and Santa Catarina states (the 450 MHz band was jointly acquired with Intelig).  Certain 4G coverage commitments will be effective as early as April 2013, which the first coverage
 
 
commitments for the 450 MHz band are effective by June 2014.  Satisfaction of the these coverage commitments demands heavy capital investments and a commitment to acquire products with national technology.
 
We participated in the auction as a group bidding in the name of TIM and Intelig.  We did not bid for the W block (Amazonas as a rural area), which we viewed as having a high premium in the X block (67%), whereas we successfully acquired the V1 block, which in our view held the best CAPEX/OPEX profile associated with rural services in its selected regions (RJ, ES, SC and PR).  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.
 
The year 2013 began with indications from the government and Anatel that they hoped to speed the move to digitalization of TV in Brazil.  The objective is to free a “digital dividend” band, of the 700MHz spectrum, attributed to mobile services and free of TV channels before the end of 2013, allowing the band to be auctioned off in early 2014.  The rules of the Digitalization Plan, the attribution of the band and the auction have not been clarified and we expect that in some cities this schedule will not be met, making it necessary to have specific plans per region.  The 700MHz spectrum with its long range and good penetration characteristics is very important to support rural obligations and city coverage but given its proximity of the 2.5GHz auction and the attendant obligations already in deployment, the 700MHz band loses some of its value in network synergy and infrastructure deployment.
 
In addition, Anatel is expected to auction bandwidths in the 3.5 GHz and 10.5 GHz (WI-MAX) spectrum to provide broadband wireless and fixed telephony services, though it is uncertain when these auctions will occur, as they have been delayed due to certain issues regarding band attribution and interference issues.  We are still analyzing whether to bid for this bandwidth when and if it becomes available.  Were we to bid, there is no assurance that our bids will be successful.  Purchasers of these bandwidths could potentially offer services that could compete with our services.
 
VU-M and Wholesale Market
 
The interconnection of telecommunication operators is mandatory, allowing the users of different services to make calls from one network to another. In the case of PCS, Anatel has established that, whenever its network is used to originate or to receive calls, the operators will receive the Value of Use of PCS Network (VU-M), also known as mobile termination rate, set by free agreement.
 
Anatel urged us to adopt a single VU-M by region of the PCS License General Plan (Plano Geral de Autorizações), or PGA, which began on November 1, 2010.
 
In October 2011, Anatel established a mechanism for reducing fixed-to-mobile call rates, applying a reduction of 18% in February 2012, and a forecast reduction of 12% in 2013.  In November 2012, Anatel decided that the VU-M in 2014 would be 75% of the valid VU-M in 2013, and in 2015 it would represent 50% of the valid VU-M in 2013.  We believe the rate reductions put in place by Anatel fail to consider the need to preserve PCS market competition, and have filed an administrative appeal with Anatel, which was denied in December 2012.
 
In December 2010, Anatel approved a public hearing that considered alterations of the Industrial Exploration of Dedicated Lines (Exploração Industrial de Linha Dedicada), or EILD, which established mechanisms for the operation of transmissions circuits 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, substantially lower than those previously in place, and a step towards value fixation in disputes between service providers.
 
According to the new REILD, contracts executed prior to its implementation should be amended within 120 days from publication.  We have started discussions to amend our EILD contracts, though we have found it necessary to ask Anatel’s intervention to solve certain disputes. While the new REILD provides procedures for
 
 
promptly resolving disputes involving the provision of dedicated lines, Oi has taken legal actions that are delaying the actual amendment of our EILD contracts.
 
Costs Model
 
The implementation of a costs model by Anatel has been in development since March 2005, when the Separation and Allocation of Accounts Document (Documento de Separação e Alocação de Contas), or DSAC was approved, for pricing of STFC and PCS interconnection, as well as wholesale market inputs, in particular with regards to dedicated lines (EILD) and unbundling.
 
In August 2011, a consortium headed by Advisia Consultants was hired to develop the optimized modeling of costs, which will be the basis for all the models the agency will use, in particular when establishing rates and prices of telecommunications services.
 
The implementation of the costs model was one of the short term goals set by the PGR, with expectation of conclusion in 2013, however, its technical complexity indicates that it will only be effective at the end of 2014.
 
In December 2012, Anatel held, in Brasilia, the International Seminar on Modeling and costs. The event aimed to provide an overview of the model development costs in the region of the Americas and Brazil. Some meetings have taken since this time to discuss changes in the cost model with national operators.
 
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 radiofrequencies, determining that, after a period of 360 days from the publication, the use of analog technology in radiofrequencies sub bands of 800 MHz would no longer be allowed.
 
In relation to the use of such radiofrequencies, we no longer have any subscriber of analog technology (AMPS).  However, our analog networks are still used by STFC concessionaires to provide services to subscribers in rural areas of the country, a service called RuralCel.
 
The implementation of the RuralCel service was carried out by the companies in the Telebrás system, prior to the privatization process in 1998.  Once the privatization of these companies was completed, SMC operators are required to keep sharing such infrastructure (mobile networks with analog technology) with STFC concessionaires with rural subscribers.  There is a dispute with STFC concessionaires as to the compensation payable for the availability of the RuralCel support network.
 
Anatel decided to postpone shutting down this service indefinitely and as a result, we continue to interact with the regulating agency to get a definite decision on the shutdown of our analog mobile networks.
 
Regulation of Quality
 
In October 2011, Anatel published PCS and SCM quality management regulations to establish quality parameters which will have to be met by the mobile telephone and internet connection operators in up to 12 months.  Most quality parameters established became effective in October and November 2012.
 
Among such quality parameters, most notable are the ones relating to the quality of the networks, both mobile and fixed, creating obligations of minimum and average speeds in numbers, higher that those currently used by operators, which will require investments so that such obligations can be met.
 
As a response to the need to better quantify the financial impacts, Grupo Oi has presented cancellation request along with a revision request to Anatel for the presentation of technical surveys of the economic impacts of the new regulations.
 
The aforementioned request was submitted for a public hearing by Anatel, which resulted in a series of differing opinions regarding quality measures by the different operations that are currently being considered by Anatel.
 
 
With regard to STFC, Anatel approved in December 2012 the Quality Management Regulation for STFC service providers, the purpose of which is the creation of a new quality management model available, such as Quality Management Regulation for PCS and SCM.
 
In February 2013, Anatel published STFC quality management regulations to establish quality parameters which must be met by fixed telephone operators in 120 days.  All parameters established will become effective from June 2013.
 
Consolidation of TIM and Intelig STFC Licenses
 
With the merger of Intelig with and into TIM we were required to eliminate the existing overlapping licenses in order to abide by regulations.  We were given 18 months to implement these changes, beginning on the date of closing of the transaction.  This term was later extended for an additional 12 months, expiring on June 30, 2012.
 
On December 30, 2011 we filed petitions with Anatel to authorize the consolidation of our STFC license terms in the local mode under Intelig and STFC LDN and LDI under TIM.  On June 30, 2012 we returned CSP 23 to Anatel, keeping the operation of STFC LDN and LDI bound to CSP 41 under STFC LDN and STFC LDI of TIM, whereas Intelig keep the STFC local license.
 
The amendments to the STFC Instrument of Authorization executed between TIM/Intelig and Anatel providing on the foregoing statutes were published on October 26, 2012.
 
On August 29, 2012, the companies Fiber SP and Fiber RJ formalized before Anatel their waiver of SCM exploration authorizations. Promptly thereafter, both companies were merged into TIM, which is already authorized to provide such services. The SCM authorizations held by Fiber SP and Fiber RJ were terminated by Anatel. Upon absorption of Fiber SP and Fiber RJ, TIM, as successor in interest, became the provider of the services previously provided by these companies.
 
Inclusion of ninth digit in 011 area code numbers
 
In December 2010, Anatel published Resolution No. 553/2010, determining the inclusion of one more digit for mobile numbers in the 011 area code region, which includes the city of São Paulo and neighboring cities.  Anatel’s decision to add one more digit to mobile phone numbers in the 011 area code was intended to increase the availability of numbers in the metropolitan area of São Paulo from 37 million to 90 million, as it is expected that availability of mobile numbers would end by 2013 at the current rate of subscription growth.  The ninth digit was successfully implemented on July 29, 2012.  The change requires users to add the digit 9 to the beginning of existing mobile numbers.
 
This measure requires residents of the 011 area code region to carry out possible adjustments to private equipment and systems such as, for example, PABX equipment and phone lists, in addition to technical adjustments carried out by telecommunication companies.  Technical, Communications and Regulatory work groups have been created by representatives of all PCS and STFC operators, in order to prepare for the implementation of the ninth digit in a synchronized way for all the operators, with standardized communication to avoid adjustment difficulties for users.
 
After July 29, 2012, calls to mobile numbers using the 8 digits were still completed for a 90-day period, to allow networks and users to adapt.  During these 90 days, operators implemented gradual interceptions and users received messages with guidance on how to dial.  After this transition period, calls to mobile numbers dialed with 8 digits were no longer completed.
 
 
Anatel has defined the terms for implementing the ninth digit in PCS in other locations in Brazil, as follows:
 
Term
State
 
National Codes
December 31, 2013
São Paulo
 
12, 13, 14, 15, 16, 17, 18, and 19
January 31, 2014
Espírito Santo and Rio de Janeiro
 
21, 22, 24, 27, and 28
December 31, 2014
Amapá, Amazonas, Maranhão, Pará, and Roraima
 
91, 92, 93, 94, 95, 96, 97, 98, and 99
December 31, 2015
Alagoas, Bahia, Ceará, Minas Gerais, Paraíba, Pernambuco, Piauí, Rio Grande do Norte, Sergipe
 
31, 32, 33, 34, 35, 37, 38, 71, 73, 74, 75, 77, 79, 81, 82, 83, 84, 85, 86, 87, 88, and 89
December 31, 2016
Acre, Distrito Federal, Goiás, Mato Grosso, Mato Grosso do Sul, Paraná, Rio Grande do Sul, Rondônia, Santa Catarina, Tocantins
 
41, 42, 43, 44, 45, 46, 47, 48, 49, 51, 53, 54, 55, 61, 62, 63, 64, 65, 66, 67, 68, and 69
 
The ninth digit will be implemented in all the remaining areas of the state of São Paulo on August 25th, 2013, and in the states of Rio de Janeiro and Espirito Santo on October 27th, 2013. The change requires users to add the digit 9 to the beginning of existing mobile numbers.
 
Anatel Administrative Proceedings
 
Under the terms of its PCS authorization, TIM Celular implemented mobile personal telecommunications coverage for the assigned area.  Under such term of authorization, TIM Celular 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 is subject to Obligation Non-Compliance Determination Procedures (“PADO”) and applicable penalties.  Anatel has brought administrative proceedings against the TIM Group for (1) noncompliance with certain quality service indicators (PGMQ); and (2) default of certain other obligations assumed under the Terms of Authorization and pertinent regulations (Resolution nº.477).  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.
 
C.
Organizational  Structure
 
Substantially all assets held by TIM Participações consist of the shares of its wholly-owned subsidiaries TIM Celular (headquarters located in the State of São Paulo), and Intelig (headquarters located in the State of Rio de Janeiro).
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