Brazil Tax Alert - 2 March 2012
Government revises definition of “short-term” for purposes of IOF on foreign loans
By Marcelo Natale, Mauricio Bianchi Ferreira and Cristina Arantes Berry
The Brazilian government published Decree 7,683 on 1 March 2012 that changes the definition of “short term” for foreign loans and bond issues, from an average term of 720 days to an average term of three years for purposes of determining the applicable rate of the financial transactions tax (IOF). The IOF is a tax levied on exchange, credit, insurance and securities transactions.
The decree extends the definition of short-term from two years to three years, but it does not make any changes to the existing IOF rate of 6%. As a result of the change in the definition, however, as from 1 March 2012, foreign exchange transactions carried out on the inflow of funds (including simultaneous exchange settlements) for loans of a term shorter than three years will be subject to the 6% IOF. Loans with maturity terms exceeding three years will continue to be subject to the non-short-term IOF rate of 0% on inflow and outflow for loan settlements. The 0% rate also continues to apply to outflows for loan settlements regardless of the maturity term.
Loans that are contracted with terms exceeding three years and that are settled in full or in part before the expiration of the three-year period are subject to the 6% rate (plus penalties and interest, etc.).
Decree 7,683 emphasizes that foreign exchange transactions (including simultaneous exchange settlements) carried out by foreign investors on the purchase of Brazilian depository receipts registered on the exchange commission remain subject to the 0% IOF rate.
The Brazilian authorities have been using the IOF as a tool to control the inflow of international funds into the Brazilian financial market. The changes introduced by Decree 7,683 are part of an ongoing effort to halt the entry of speculative capital into Brazil and avoid the recurring appreciation of the Brazilian currency that is reducing the competitiveness of Brazilian exporters.