Originally published in the March 17 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
Brazil’s official gazette on March 13 published Presidential Decree No. 6,391/2008, which once again changes the rates of the financial transactions tax (IOF) to several transactions, applicable to certain currency exchange, insurance, loan, and financing transactions.
Some of the new IOF measures are effective as of the date of publication while others are effective as of March 17. In some cases, the decree simply clarifies decrees 6,306, of December 14, 2007, and 6,339, of January 3, 2008, which, respectively, consolidated IOF rules and promoted the first round of IOF changes after expiration of the 0.38 percent bank transactions tax in late 2007.
Decree 6,391 deals with credit and exchange transactions, with no changes to insurance transactions.
Below is a summary of a preliminary review of the new IOF rules applicable to credit and exchange transactions introduced by Decree 6,391/2008.
The decree clarified that in credit transactions with fixed terms, the maximum IOF rate is 1.5 percent for corporate borrowers and 3 percent for individuals, plus an additional IOF of 0.38 percent for all transactions falling into this category. The application of this rule was unclear at the time Decree 6,339 was issued.
Regarding extensions, renewals, renegotiations, consolidations and similar loan/credit transactions, the decree clarified that the 0.38 percent additional IOF tax does not apply unless new monies are made available to borrower.
Export credit transactions were subject to a zero IOF until January 3, 2008, when the rate was increased to 0.38 percent. However, the government has reconsidered the IOF increase and has reduced the rate back to zero. The same applies to other export credit transactions, such as the so-called advance of export exchange contract (adiantamento de contrato de câmbio de exportação), which is now back to zero-rate IOF.
Credit transactions carried out by financial institutions and related to transfer (to local borrowers) of resources obtained abroad were subject to zero-rate IOF. Revoked by Decree 6,391, effective March 17, these transactions will be subject to daily IOF of 0.0041 percent for corporate borrowers and 0.0082 percent for individuals, limited to 365 days.
Exchange transactions resulting from exports of goods and services were subject to a zero-rate IOF until January 3, 2008, when the rate was increased to 0.38 percent. However, the government has reconsidered the IOF increase and has reduced the rate back to zero.
Exchange transactions in connection with investments in international investment funds, under the conditions established by Brazil’s Securities and Exchange Commission (Comissão de Valores Mobiliários) are subject to zero-rate IOF as of March 13.
Exchange transactions carried out by foreign investors for investment (inflow of funds into Brazil) in financial and capital markets, previously subject to a zero-rate IOF, now are subject to a 1.5 percent IOF rate as of March 17. Exceptions apply to investments in the stock markets, commodities and future markets, initial public offers, or subscription of shares. In practical terms, that means that variable income markets are free from the new 1.5 percent IOF, while the new tax applies to virtually all fixed-income investments. This change applies as of March 17.
Exchange transactions carried out by foreign investors for return of funds (outflow of funds from Brazil) invested in Brazilian financial and capital markets are subject to zero-rate IOF.
Exchange transactions for payment abroad of interest on equity and dividends received by foreign investors in connection with investments made through the two preceding items above are subject to zero-rate IOF. Those transactions were zero rated until January 3, 2008, when the IOF rate was increased to 0.38 percent. The government has now reduced the rate back to zero, effective March 17.
Exchange transactions carried out by international air transport companies, domiciled outside Brazil, for remittance of domestic income to their home countries are subject to zero-rate IOF.
Exchange transactions for entry of foreign currency to cover expenses of credit cards issued outside Brazil were zero rated until January 3, 2008, when the IOF rate was increased to 0.38 percent. The government has now reduced it back to zero.
Certain simultaneous exchange transactions carried out by financial institutions were subject to a zero-rate IOF until January 3, 2008, when the rate was increase to 0.38 percent. However, the government has reconsidered the IOF increase and has reduced the rate back to zero.
Most of the changes described above are designed to stimulate remittances of currency outside Brazil in an attempt to stall the appreciation of the Brazilian real vis-à-vis the U.S. dollar.
David Roberto R. Soares da Silva