A soap opera called IOF

As our beloved Tom Jobim once said, "Brazil is not for beginners." And he was right! Every day brings a new thrill, and last week we saw another chapter in the exciting narrative of being Brazilian. In the dead of night—just kidding, I just wanted to build some suspense—but it was actually at the close of the markets that the Brazilian government decided to release a statement changing some IOF tax rates for certain transactions. This caused such collective hysteria that, by the next morning, the government had already backtracked on one of the measures. Honestly, it’s hard to say what was worse: the IOF hike or the regret shown less than 24 hours after the announcement. Is this a sign of an institutional crisis? We can discuss that another time. For now, let’s understand the main changes made to this much-feared tax.

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First things first, let’s learn what these letters mean, what they’re for, where they came from, and where they’re going! The IOF (Tax on Financial Operations) is a Brazilian federal tax levied on credit, foreign exchange, insurance, and securities transactions. It has two main functions: to generate revenue for the government and to act as a regulatory tool for economic policy. The government can adjust the IOF to stimulate or curb consumption, control inflation, or encourage investment and exports. Furthermore, the IOF is regulated by the federal government and can be changed at any time—both in terms of rates and incidence rules—without the need for Congressional approval. That is exactly what happened last week, much to everyone's dismay! It is worth remembering that several changes have been made to the IOF over time; see the table below:

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Returning to the present day, the recent changes to the IOF reflect the government's attempt to boost tax collection and ensure compliance with 2025 fiscal targets, as mentioned above. However, some measures were not well received (and the government reacted immediately), while others we will simply have to adjust to. It’s a case of "grin and bear it." The increase in the rate on corporate credit operations, for example, which rose to 3.95%, raises the cost of capital, especially affecting small and medium-sized enterprises and potentially slowing down investment and economic activity in the short term. Additionally, the increase in the IOF on international card transactions to 3.5% makes travel and purchases abroad more expensive, discouraging foreign consumption. The most controversial measure, however, was the attempt to tax transfers for investments abroad at 3.5%, which triggered a strong negative market reaction, leading the government to quickly retreat. Therefore, transfers of funds abroad without a specific purpose (remittances of availability in the table) are now taxed at the 3.5% IOF rate. Meanwhile, remittances for investment purposes maintain the previous rate of 1.1%.

It is worth noting that several other operations remain exempt or have a zero rate, as is the case with the IOF on foreign exchange. For example, interbank operations, imports and exports, the entry and return of foreign investor funds, and the remittance of dividends and interest on equity to foreign investors remain untaxed.

                                           
We have listed the main changes for foreign exchange, credit, and insurance operations in the table below:

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Although these measures help ease the fiscal burden in the short term, they can generate significant side effects, such as making credit more expensive. This would lead to a reduction in consumption and, consequently, a downward revision in economic growth projections—which, it should be noted, are currently doing very well! Remember that these rates can be changed again at any time, without prior notice. It is up to us to keep following the not-so-unprecedented chapters in the trajectory of a tax called IOF.

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