Brazil Tax Alert - 12 March 2012
"Short-term" loan period extended for purposes of financial transactions tax
By Marcelo Natale, Mauricio Bianchi Ferreira and Cristina Arantes Berry
On 12 March 2012, the Brazilian government published Decree 7,698, which extends the term of short-term overseas loans and bond issues from an average term of three years to five years (i.e. from 1,080 days to 1,800 days) for financial transactions tax (IOF) categorization purposes. The IOF is a tax levied on exchange, credit, insurance and securities transactions, and Decree No. 7,698 represents yet another attempt by the Brazilian government to stem the flow of short-term speculative capital into Brazil.
A decree issued on 1 March 2012 (Decree No. 7,683), which was also intended to prevent the inflow of such capital into the country, had already extended the term of loans falling within the definition of short-term overseas loans and bond issues from 720 days to three years, which was subsequently clarified as being equivalent to 1,080 days.
Decree 7,698 now extends the definition of "short-term" from three years to five years without changing the 6% IOF rate. Foreign exchange transactions carried out with respect to the inflow of funds for the settlement of loans (including simultaneous exchange settlements) with a term of less than five years will be subject to the 6% IOF. The inflow and outflow of funds for the settlement of loans with a maturity term exceeding five years will continue to be subject to the non-short-term IOF rate of 0%. The 0% rate also continues to apply to outflows for loan settlements regardless of their maturity term.
Decree No. 7,698 is effective as from 12 March 2012. Loans contracted under previous decrees are not affected retroactively, meaning that each inflow should be analyzed under the prevailing rule in effect at the time the relevant loan was contracted.
This is the fourth attempt by Brazilian government to increase the minimum term of short-term loans since March 2011. The term was initially increased from 90 days to one year, then to two years, then to three years and now to five years. The increasing volatility of the foreign exchange market, referred as the "currency war" by the Brazilian Finance Minister, has created a number of distortions affecting Brazilian exporters, giving rise to growing concern.
Although the government could eventually increase the IOF rate from 6% to up to 25%, the IOF is primarily thought of as a monetary tool for achieving stability in the currency market by penalizing speculative short-term investment. The Brazilian Central Bank also is working toward this goal and has recently reduced the domestic interest rate by 0.75% to 9.75%. This was the fifth consecutive rate reduction adopted by the monetary authority.