December 19, 2008
Previously published on November 21, 2008
Brazil’s Contribuição Provisória Sobre Movimentação Financeira (CPMF) tax (also known as check tax) expired effective January 1, 2008, and in its stead, in December 2007 the Brazilian government enacted Decree nr. 6,306/08 increasing the IOF (Financial Operations Tax) rates on various transactions, mainly those dealing with the inflow and outflow of foreign currency. Decree 6,306/08 still lists a number of foreign currency exchange transactions that remain subject to the zero rate. However, for all other exchange transactions that were subject to tax under Decree 6,306/08, the IOF tax is levied at the rate of 0.38 percent. For example, some credit and insurance operations that were exempt became subject to IOF tax at 0.38 percent, while the rate on credit transactions increased from 1.5 to 3 percent (applicable to loans with repayment term exceeding 365 days).
In terms of foreign exchange operations, importation of services and exportation of goods and services have become subject to the IOF tax at the rate of 0.38 percent. Previously, under the CPMF tax, the rate for these transactions was zero. The IOF tax is triggered when the taxpayer executes the so-called exchange contract--the instrument required under Central Bank regulations for purchase and sale of foreign currency.
The extinct CPMF tax was levied at the rate of 0.38 percent on virtually all debt transactions posted to checking accounts – hence the acronym “check tax.” It was an important source of tax revenue. Once it expired, Brazil’s government argued that the IOF tax had to be increased to compensate for a significant shortfall in its federal budget.
The IOF tax is levied at the federal level. It is an instrument of financial policy, applying to insurance, credit, foreign currency exchange and certain transactions with gold. Its rates can be raised or lowered through presidential decree and can be increased to a maximum of 25 percent - although in most cases it is capped at 2.38 percent.
Responding to Global Crisis, Brazil Modifies Decree to Attract Foreign Investment
The global financial crisis has had a severe impact on the Brazilian foreign currency market. In recent weeks, the value of the Brazilian Real against the US dollar has fallen by some 40 percent. In an attempt to attract foreign speculative investment, Brazil’s federal government enacted Decree 6,613/08 on October 22, 2008 modifying Decree 6,306/08 by reducing to zero the IOF tax rate on the following transactions dealing with foreign currency exchange:
1) inflow and outflow of currency carried out by foreign investors in the financial and capital markets under CVM regulations (CVM is equivalent to the SEC).
2) outflow of currency to pay interest on net equity and dividends to foreign investors, to the extent of their transactions in the financial and capital markets described in item 1.
3) certain foreign exchange transactions (such as currency swaps) carried out by qualified financial institutions
4) inflow and outflow of currency related to foreign loans executed as of October 23, 2008.
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