IOF Tax on Pre-Paid Debit Cards Up to 6.38% for Brazilians

By Alfred Rinaldi, Contributing Reporter

RIO DE JANEIRO, BRAZIL – Residents of Brazil making purchases abroad using travelers’ checks and pre-paid debit cards have been caught unawares by a surprise hike in the foreign transactions tax IOF. The Imposto sobre Operações de Crédito, Câmbio e Seguro (Tax on Credit, Exchange and Insurance Transactions) has been raised to 6.38 percent from 0.38 percent effective Saturday, December 28th.

Unlike other tax increases, which must be announced thirty days in advance by law, the Brazilian government is at liberty to alter the IOF-rate by decree with immediate effect.

The higher rate brings pre-paid debit cards and travelers’ checks in line with foreign credit card transactions, which have been attracting the 6.38 percent rate since September 2011.

According to the official announcement of the Ministério da Fazenda, Brazil’s Treasury, the hike serves to “harmonize all means of foreign exchange operations with the rules applying to international credit cards.”

The measure, according to the statement, “avoids that one method of payment should be overlooked when compared to others as a result of its tax treatment.”

To many observers, however, the move is more than just an administrative cleaning-up exercise. Reginaldo Galhardo of the currency brokers Treviso Corretor is one of those who detects an ulterior motive.

“The government’s intention”, according to him, “is to rein in Brazilian consumption abroad. Even with the appreciation of the U.S. dollar, Brazilians have been spending record sums outside Brazil. And pre-paid debit cards were their favorite method of payments thanks to its favorable tax treatment.”

According to the Brazilian Treasury itself, the tax hike should swell its coffers by R$552 million per year. For Galhardo, the move is aimed at balancing the government’s books. “The best way of going about this would be to reduce public expenditure, but this is not part of government strategy, especially as the electoral year approaches.”

The U.S. Federal Reserve’s announcement to phase out or “taper” Quantitative Easing (QE) has added to Brazil’s balance of payments woes, leading to a capital outflow from the real into the dollar to the tune of R$4.3 billion in just 72 hours, almost doubling the foreign exchange deficit vis-a-vis the United States to R$11.2 for the current year.

Brazilian tourists have been spending ever greater sums abroad, further accentuating the problem. Between January and November this year, they have spent US$23.1 billion (R$53.9 billion) outside the country, a rise of fourteen percent compared to the same period in the previous year. This appetite for foreign purchases has helped to raise Brazil’s current account deficit vis-a-vis the world to US$72.7 billion (R$169.6 billion).

High taxes on imported luxury goods have made it common practice for affluent Brazilians to travel abroad in order to make their purchases at much lower cost. Since the 6.38 percent levy on credit card transactions, the much more lightly-taxed pre-paid debit card and travelers’ checks had become a popular means of payment – a loophole which is now closed.

Only cash purchases of foreign currency are still taxed at the more favorable rate of 0.38 percent, a saving which is tempered by the risk of loss or theft.

Travellers feeling the sting of the new tax may spare a thought for their southern neighbors. At the beginning of this month, Cristina Kirchner of Argentina raised the levy on credit card purchases made abroad to an eye-watering 35 percent, up from twenty percent previously.

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