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By Velloza & Girotto
Brazil’s multipronged financial transactions tax – its lengthy official name is referred to in short as Imposto sobre Operações Financeiras (IOF) - encompasses inter alia foreign exchange (FX) transactions (IOF/FX).More precisely, IOF/FX taxes FX contracts through which Brazilian residents sell to or purchase from banks in Brazil the FX made available to them by, or which they owe to, non-residents that provide FX under cross-border financial transactions (CBFTs) such as loans, export advances, and export financings.
IOF/FX is a regulatory tax triggered when inbound or outbound FX is exchanged under FX contracts relating to CBTFs. The rate varies depending on the nature of the CBFT, and ranges from zero to 6.38% of the respective amount.
IOF/FX rates – which are capped at 25% - are changed often by the government in an attempt to discourage movements that it believes either overvalue or undervalue the Brazilian real (BRL) against the US dollar beyond levels warranted by its monetary policy.
Such a change was applied to short-term FX loans. Taking the view that a significant portion of them was speculative while aggravating overvaluation, 6% IOF/FX was assessed on those with a tenor of up to 360 days disbursed, initially, between March 29 2011 and June 4 2011. Extensions to 720, 1,080 and 1,800 days ensued (the latter of which remains in effect for drawdowns after December 3 2012).
By contrast, generally and as a matter of law, export financings enjoy a zero IOF/FX. The tax authorities set out on their own motion to issue an act last March by which they imposed 6% IOF/FX on those made for less than 1,800 days through on-lending to Brazilian banks. On-lending in this context means advances to Brazilian exporters made by banks in Brazil that they fund under trade facilities abroad. Effectiveness of the act is questionable insofar as an administrative act cannot override a law.
As to export advances (whereby a non-resident importer advances funds directly to the Brazilian exporter against its receivables), Brazilian regulatory authorities recently issued a rule that limits such payments by a nonresident importer to a maximum tenor of 360 days. Export advances should be treated as IOF/FX zero-rated because they fall within the general export financing category.
As market conditions worldwide seem to worsen, new adjustments in IOF/FX rates, this time in the opposite direction to promote FX liquidity, should not be ruled out. These may even include an adjustment downwards in the 6% rate on FX loans.