Brazil - A Quick Guide to the IOF Tax

IOF on Foreign Currency Inflows

Brazilian Finance Minister Guido Mantega announced last Monday that
capital inflows regarding portfolio investments and investments in local
assets will be subject to IOF taxation (at 2%, to be paid on the
settlement date of the BRL 'Reais'). This is the main channel used by
foreign investors to invest both in Equities and Fixed income in Brazil.

The IOF over FX transactions to buy any assets, through the Resolution
2689 was increased from 0% to 2%, regardless how long the investment
remains in Brazil (short or long term).

This is the first time the government imposes an IOF over investment in
equities. From March to October 2008, the IOF for fixed income was
subject to an IOF of 1.5% but for equities remained unchanged at 0%.

In other words:

- All Capital Inflows to Fixed income and Equity Investments are
subject to the IOF taxation at 2%.
- The IOF must be paid in the Foreign Exchange Transaction when
the foreign investor is Buying BRL in all transactions closed from
October 20 onward
(FX contracts closed until October 19 are exempt of the new IOF).
- The IOF tax must be applied on the gross up value, i.e. If you
traded BRL 1.000.000,00 at Bovespa so, the FX contract must be closed
for BRL 1.020.408,16 = BRL 1.000.000,00 / 0,98. Please always observe
this rule for the next FX transactions. See table below:

Amount Traded at BOVESPA

BRL 1.000.000,00
FX Amount to be Considered
BRL 1.020.408,16
IOF Tax on the FX contract
BRL 20.408,16
NET BRL Amount to be paid to local custodian
BRL 1.000.000,00

Calculation
BRL 1.000.000 (100%-2%) = Grossed up Amount = BRL 1.020.408,16 = FX
amount to be closed.

- Please take note that the event to be taxed is the FX contract and
the responsible to collect the IOF on the FX transactions is the Bank
where the FX deal is closed and not the local custodian."