The cost of all telecommunications services to the customer includes a variety of taxes. The principal tax is a state value-added tax, the Imposto sobre Circulação de Mercadorias e Serviços, or the ICMS, which the Brazilian states impose at varying rates on revenues from the provision of domestic and international telecommunications services. Currently, in Rio de Janeiro State, the ICMS rate on domestic telecommunications services is 25%. As described above, this rate could vary from state to state. In September 1996, Complementary Law No. 87, which called for the abolishment of ICMS for outbound international calls, was enacted. Based on an official interpretation of this law, the operating subsidiaries of Telebrás were instructed in November 1996 to stop collecting ICMS on outbound international telecommunications.

Contrary to these instructions, some state tax agencies have assessed local fixed-line operators for collection of ICMS on international calls, including those companies for which the operators provided billing services. These billing arrangements ended as of December 31, 1999. From January 2000, we began directly collecting ICMS at a rate applicable to each state, on international telecommunications, as a precautionary measure in order to avoid other assessments.

It is important to comment that it is unlikely to predict the outcome of the judicial decisions regarding interpretation of Complementary Law No. 87 of September 1996. Notwithstanding, management tax advisors realize that there are strong arguments favorable to the Company position. See note 18 to our consolidated financial statements.

In 2000, Complementary Law No. 102 was enacted. Such Complementary Law provides that the ICMS tax levied upon fixed assets could be used as an ICMS tax credit, divided in 48 installments and no longer in a single tax credit entry. Therefore, management realized that the ICMS tax burden will increase for the year 2001.

Other charges on revenues include two federal social contributions, which are:

Such charges had been imposed at a combined rate of 3.65% on total revenues commencing on February 1, 1999. Prior to Law 9.718, the combined rate of both taxes was 2.65%. We are still challenging Law No. 9.718/98, which mandates that: (1) taxable revenues for purposes of PIS and COFINS include financial revenues and exchange rate variations; and (2) the applicable rate of 0.65% and 2.00% respectively. We are making judicial deposits for an amount equal to the financial revenues and exchange rate variations levied at a rate of 3.65% as well as for the 1% rate of COFINS due for the telecommunication services provided.

We intend to continue this practice pending the court's decision. PIS and COFINS have been imposed at a combined rate of 3.65% on total revenues since February 1, 1999. Prior to this date, the combined rate of both taxes was 2.65%.

Regarding income tax levied upon inbound international call, we currently pay income tax on income from inbound international calls as a precautionary measure, pending a judicial decision on this matter. See note 18 in our consolidated financial statements.