Political Risk Latin America Blog @PolRiskLatam

What is the IOF/FX? How can it impact foreign investments in Brazil?

Posted in News and Articles, Political Risk by politicalrisklatam on November 18, 2010

by Andrea Bazzo Lauletta  and Flavio Mifano, Mattos Filho, Veiga Filho, Marrey Jr. e Quiroga Advogados for Latin American Venture Capital Association, November 15th, 2010.

On October 4, 2010, the Brazilian Government issued a rule to increase the Tax on Foreign Exchange transactions (“IOF/FX”) from 2% to 4% for the inflow of funds in Brazil for several financial and capital market investments. On October 18, 2010 the rate was once again raised to 6%.

Such increases were based on the assumption that the inflow of resources into Brazil was taking the Brazilian currency to an undesired valuation, especially related to the acquisition of fixed income securities, which have high interest rates compared to international standards.

As a rule, the Brazilian Tax System ensures a known tax environment so that the taxpayers are able to carry out their business and transactions with a certain definition of the corresponding tax burden. In this context, the Constitution generally states that taxes can only be enacted or increased by a law duly approved by the National Congress and such an enactment and increase can only be put into effect after a certain period (after 90 days or as of the following year, as the case may be).

However, there are a few exceptions to the rule which are constitutionally authorized and used by the Government as mechanisms of macroeconomic policies. In these situations, a certain tax can be increased by an act of the Government, without prior approval and with immediate application. This is the case with the IOF/FX, which is due upon the conversion of foreign currency to Brazilian currency and on the conversion of Brazilian currency to foreign currency. (continue reading… )

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