Scope Of Brazil's IOF Increase Is Widened

by Mike Godfrey, TaxNews.com, Washington

14 October 2010

The scope of the 4% tax on foreign investments in fixed income instruments in Brazil (IOF) has been clarified to include such types of investments as stock funds, multi-market funds and debentures.

Brazil's Official Gazette has reissued the decree which increased the IOF from 2% to 4% for certain fixed income investments because of the lack of clarity about the scope of the measure.

The Ministry of Finance said that in general, the new rate was 4%, but Commodities and Futures Exchange dealings and public offerings remain taxed at 2%. On the other hand, although stocks are equity investments, the ministry said equity funds are taxed at 4% because dealings do not go through the stock exchange.

The finance minister, Guido Mantega, had previously announced the IOF tax increase as one on foreign investments in fixed income with the objective of reducing inflows of foreign capital into Brazil and easing demand for the Brazilian real. Foreign investments in the stock market, however, continue to pay a tax of 2% and direct foreign investment continues to be exempt from taxation.

The IOF was removed by the government in October 2008 but reimposed in October 2009 on incoming foreign exchange transactions.

The new rate became effective on foreign exchange contracts concluded after October 5, 2010.

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