Decree 7,536 amended regulations regarding Brazil's tax on financial transactions (IOF) by introducing rules for levying the IOF on securities transactions involving derivative agreements. The IOF will be charged at 1% on the "notional adjusted value" of acquiring, selling, or early termination of derivatives where the value is affected by exchange rates and increases net sold exposure. The decree defines how to calculate the notional adjusted value and net sold exposure. It allows offsets between exposures calculated by different financial institutions with client authorization. A 0% IOF rate applies where net exposure is under $10 million or for unspecified derivative agreement acquisitions, sales or maturities.

1. IBFD Tax News Service 3 August 2011
Tax on financial transactions levied over derivative agreements regulated
Decree 7,536, published in the Official Gazette of 27 July 2011 and effective as from this date, amended the
regulations with regards to the tax on financial transactions (Imposto sobre Operações Financeiras – IOF),
brought by Provisional Measure 539 (for previous report see TNS:2011-08-01:BR-1), by introducing rules
applicable to the IOF levied on transactions related to securities involving derivative agreements.
Decree 7,536 determines that the IOF shall be charged at the rate of 1% on the "notional adjusted value"
upon the acquisition, sale or early maturity of financial derivative agreements for which:
– the liquidation value is affected by currency exchange fluctuations; and
– the result is an increase of the "net sold-out exposure" vis-à-vis the one calculated by the end of the
previous day.
The "notional adjusted value" [NAV] is calculated as follows:
AxB
where:
A = the reference value of the agreement (notional value)
B =the price fluctuation of the derivative vis-à-vis that of its underlying asset
The "net sold-out exposure" is:
∑ C x NAVn
where:
C = the quantity of financial derivative agreements (the liquidation of which is affected by currency exchange
fluctuations)
NAVn = the notional adjusted value of each agreement
n = the total number of agreements
Decree 7,536 allows the offsetting of exposures of the same contract owner calculated by different financial
institutions authorized to register the agreements, provided that the person grants express authorization to
such financial institutions to obtain the necessary information for the calculation of the consolidated net
exposure.
Decree 7,536 finally provides that a zero percent IOF rate applies to:
– transactions where the net sold-out exposure at the end of the day results in an amount below USD 10
million; and
– other acquisitions, sales or maturity of derivative agreements not specified by the Decree.
The IOF rate can be changed at any time by the Executive Power by means of another Executive Decree,
provided that the maximum rate of 25% stated by PM 539 is respected.
Reference: TNS:2011-08-01:BR-1; CTS:BR:9.6.; CTA:BR:14.6.3.
Report from our correspondent Bruno Carramaschi, Lobo & de Rizzo Advogados,
São Paulo