Nélio Weiss		Philippe Jeffrey

With the intention to slow down the devaluation of the Brazilian currency, caused by the current financial crisis around the globe, the Brazilian authorities published on October 23 2008, the decree 6,613 setting forth additional changes to the tax on financial transactions (IOF).

Back on January 3 2008, the authorities made initial changes to the IOF legislation as part of the measures adopted to compensate the loss of tax revenue caused by the extinction of the CPMF (bank tax). These initial changes had the effect of increasing to 0.38% the IOF due on foreign exchange, loans and insurance transactions.

The main changes set out in the new decree 6,613, and which should have a particular impact on international transactions, are the IOF rate reductions in connection with foreign exchange transactions. The reductions can be summarised as follows:

• Foreign exchange transactions associated with transfer of funds to/from Brazil for foreign investments in the Brazilian financial and capital markets (as regulated by the National Monetary Council) will now be subject to IOF at the rate of 0% (previously taxed at a rate of 1.5%);
• Foreign exchange transactions associated with payments of interest on net equity and dividends to foreign investors in connection with investments made (only) in the financial and capital markets will now be subject to IOF at the rate of 0% (previously taxed at a rate of 0.38%); and
• Foreign exchange transactions associated with inflow and outflow of funds in connection with foreign loans and financing transactions concluded as from October 23 2008, will also be subject to IOF at the rate of 0% (previously taxed at a rate of 0.38%).

Pending legislation/regulations are expected to be issued before year end in two areas.

New low-taxed jurisdictions list

On June 23 2008, the Brazilian Congress enacted new legislation, which introduced, among other provisions, a broadened definition of low-taxed jurisdictions that will enter into force as of January 1 2009. It is initially understood that the new definition of low-taxed jurisdictions focus mainly on transfer pricing provisions, that is, will have the effect to increase the transactions subject to transfer pricing. Yet, it is still unclear at this time to what extent the new provisions will affect cross border payments performed by Brazilian residents to beneficiaries located in tax havens (such as a potential increase on the withholding income tax rate applicable on interest, royalties and service payments, as well as capital gains). It is expected that the Brazilian tax authorities will issue an updated "black list" before year end.

Changes made to the Brazilian corporate act and potential tax implications

On December 28 2007, new legislation altered and revoked several provisions of the Brazilian corporate act (law number 6,404/1976) and also introduced new rules to adapt Brazilian accounting practices to international accounting standards. The changes introduced by the new law are effective as of January 1 2008 yet, some provisions are pending further regulations. While the initial regulations clearly stated that the new rules would not trigger any tax implications, the Brazilian tax community is still awaiting for final regulations from the tax authorities as to determine whether that latter would be confirmed (or not).

Nélio Weiss (nelio.weiss@br.pwc.com) & Philippe Jeffrey (philippe.jeffrey@br.pwc.com), São Paulo