A day after announcing the largest program of public concessions on roads and railways, aiming to foster investments in the country´s infrastructure, estimated in the approximate aggregate value of R$ 133 billion, the Brazilian Federal Government decided to reduce the cost of the insurance guarantee (seguro-garantia).

The insurance guarantee is one of the modalities of collateral which can be used by companies of the private sector that participate in public tenders to ensure the fulfillment of their contractual obligations under the concession agreements in connection with the execution of works and services.

The two most common instruments used as collateral to ensure the compliance of the concession agreements are the insurance guarantee issued by an insurance company and the bank guarantee (fiança bancária) issued by a financial institution. Less widely used options for this purpose are the cash deposit (depósito em dinheiro) and the acquisition of Government bonds (compra de títulos públicos).

By means of Decree No. 7787, of August 15, 2012 (Decree 7787/2012), the Brazilian Tax on Insurance Transactions (Imposto sobre Operações de Crédito, Câmbio e Seguro, ou relativas a Títulos ou Valores Mobiliários - IOF) was reduced from 7.38% to zero1. This measure will be valid and come in full force and effect 90 days as of August 16, 2012, which is the date of its publication in the Official Gazette of the Union.

Based on 2011 numbers, the Brazilian Economic Policy Secretariat (Secretaria de Política Econômica – SPE) estimated that this IOF tax cut will save project developers approximately R$ 60 billion annually, because the insurance companies were charging a higher premium to compensate the taxation. Now, when the elimination of the IOF tax becomes effective, the cost of having an insurance guarantee will be equivalent to applying for a bank guarantee, which is not subject to such taxation. Furthermore, the bank guarantee is deemed to be a loan and it is subject to the indebtedness´ levels of both the financial institution (the issuer) and the company (the beneficiary) and this does not occur with the insurance guarantee.

Footnote

1. Article 1 of Decree 7787/2012 amended item I of paragraph 1 of article 22 of the IOF regulation approved by Decree No. 6306, of December 14, 2007, as follows:
"Art. 22. The IOF rate is 25%.
§ 1º The IOF rate is reduced:
I – to zero, in the following operations:
(...)
g) insurance guarantee."

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