By means of Decree No 7,457, of April 6, 2011, the Brazilian Federal Government extended, as of April 7, 2011, the 6.0% Tax on Exchange Transactions (IOF) which is due in the case of entry of funds arising out of short-term foreign loans to operations of up to 720 days, including symbolic exchange transaction for the renewal, renegotiation or transfer of existing loans.
Previously, the 6.0% IOF tax was charged only on loans of 360 days or less.
This measure has been adopted to reduce what is known as "process of currency arbitrage", whereby a Brazilian company or bank or any foreign or domestic investor borrows money overseas at the international rates that are lower than the domestic interest rates and then invests the money in Brazil to be benefited of the rate difference.
These latest actions implemented in Brazil also come in the wake of an International Monetary Fund (IMF) report, released on April 5, 2011, endorsing capital controls. It was the first time in the IMF's history for the multilateral agency to endorse such actions, although the report was careful to say controls should be temporary in nature.
1 In this regard, please see our article entitled "Brazil increases the IOF tax on foreign loans up to 360 days" published by Mondaq.
2 In Brazil's case, high domestic interest rates, combined with low international rates, have attracted heavy short-term investment inflows. The Brazilian Selic base interest rate is presently 11.75%. Brazilian policy makers have argued that high interest rates are needed to control inflation, currently running at over 6.0%, as well as to fight down the appreciation of the Brazilian Real vis-á-vis the United States Dollar, and adversely affects Brazilian exporters and Brazilian manufactures who have to compete with cheaper imported products..
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