IOF Over International Purchases
While Brazilians were out on summer vacation, the country’s Government launched a new legislation that expanded the range of operations that were charged by the aliquot of 6.38% of IOF. Find out what happened, and how IOF is charged now.
Buying things abroad using credit cards was always something not very cheap for Brazilians, so prepaid cards, traveler's checks, and debit cards were better options for purchasing products outside Brazil. But, by the end of 2013, the country’s Government announced that the same IOF rate levied on credit card operations abroad should be expanded to these other methods of payment.
The announcement didn't really make Brazilians happy, many of them were outside the country travelling during December and January - the summer vacations in Brazil. But, what is IOF after all?
Introduction to IOF
The IOF is the tax levied on financial operations, and assessed on different types of events. It was created in the 1996 Taxation Reform in order to replace the Tax over Transfers to Abroad, which used to tax only bank operations.
With IOF, financial operations started to be the target of taxes as well, such as insurance, credit, securities, and foreign exchange operations. To each operation, a different tax rate ought to be used. The rates kept varying through the years, depending on the country's economic necessities.
IOF as a Regulatory Tax
Being the abbreviation of Tax Over Financial Operations, it is kind of obvious that the tax is charged on credit transactions, but what is its function? According to the Brazilian Government, IOF is a regulatory tax, just like IPI (Tax Over Industrialized Products), II (Import Tax), and IE (Export Tax). The IOF has, as main function, regulated the economic activity of the country. By its collection, it is possible to know the credit supply and demand situation in Brazil.
It isn’t a Fixed Tax
Being a regulatory tax, IOF is always subjected to changes, depending on the country's economic situation. For example, in December of 2013, the Brazilian Government announced an adjustment in the tax rate. The rate of 0.38% that was levied on prepaid debit cards, withdrawals abroad, and traveler's checks was increased to 6.38%, which is equivalent to a 1,579% inflation.
| IOF Rates | Before the Adjustment | With the New Adjustment |
| 0.38% | Purchase of Foreign Currency Prepaid Debit Cards Withdraw of Foreign Currency Abroad Traveler's checks | Purchase of Foreign Currency |
| 6.38% | Credit Cards | Credit Cards Prepaid Debit Cards Withdraw of Foreign Currency Abroad Traveler's checks |
Now, with the new measure, the Government will impose a larger amount of tax on Brazilians' expenditures abroad. Only in 2013, the country population expended 23 billion USD outside Brazil, 14% more than the amount registered in 2012. The forecast shows an extra collection of 0.5 billion BRL for the Brazilian Government due to the new adjustment.
With regards to the payment methods, economists continue to affirm that despite the IOF changes, the prepaid debit card is still more recommendable than the credit cards for international purchases. Even that the debit card lost the taxation advantage with the rate increase, its others advantages are still in force:
- First, the safety: It is better to carry just a card than travel with large cash quantities.
- Second, with the debit is possible to withdraw money in every part of the world and also perform payment by card, so there’s two functionalities in only one payment instrument.
- And third, when the prepaid debit card is being loaded, the owner knows the exact currency conversion that he’s paying. With credit cards, that doesn’t happen, the conversion used in credit card purchases is performed according to the daily quotation of the credit card bill issuance date.