Updates of the Week: Impacts of the IOF rate increase

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Bruno Drummond comments on the possible outcomes of such change for the economy

Check the complete audio of the interview in our Podcast (in Portuguese):

In order to fund the Bolsa Família (Family Stipend) program, the federal government raised the IOF (Tax on Financial Operations) ratesfor credit transactions carried out by legal entities, from 1.50% per year to 2.04%, and by natural persons, from 3.0% per year to 4.08%. The new rates entered into force last September 20, and should be kept until the end of December, 2021.

In this episode of the “Week Updates” program, Bruno Drummond, partner and founder of Drummond Advisors, comments on increase of the IOF rate and the impacts that might be caused by the change in Brazilian economy.

“I believe IOF has always worked as a toll to carry out credit transactions in Brazil. And such transactions go through two places: they are carried out with banks (legal entity or natural person) and through credit transactions with private parties or between related parties. I have always believed that IOF has never been a tax with an effective collection, since it is only collected when you have the credit to third parties (financial institutions, brokerage house, car credit)”, Drummond explains.

According to the executive, there is a certain precariousness in the practice of the IOF collection. “At the end of the day, IOF tends to reduce economic transactions and increase the cost of the same operations. Everything at a place where this type of process should not be necessary”.

Drummond recognizes the necessity of a source to fund Bolsa Família, but believes that raising the IOF rate is the most suitable solution in this case. “This type of taxation only takes place in the universe of banks and brokerage houses, that is, is restricted and is not complete.  It is not the same as CPMF (Provisional Contribution on Financial Activities), which, in the past, was a very effective tax. Everyone paid and the banks paid the government, so there was a very quick impact in the economy and in funds”, he explains.

For the entrepreneur, at this time of economic recovery, what Brazil needs the least is for credit to become more expensive, both for natural persons and for legal entities. “It makes no sense to add a cost where resources could come from to relieve the effects of the pandemic in the economy. This extra value to cover Bolsa Família could be collected somewhere else. Brazil is one of the greatest soy producers in the world. This toll could be incorporated into the export of soy, for instance. There are many other possibility”, he states.

“The IOF will have an impact of three to four months in the economy, but I believe it will not achieve what they wish in the collection for Bolsa Família. At this time, the only positive aspect of this action is trying to create a fund for this social initiative, which is an important plan for the country. I believe that in December we will have a new sign from the government regarding the future of IOF”, Drummond completes.

Written by Aline Ribeiro, Content Consultant of Drummond Advisors