Three little letters and one tax: understand once and for all what IOF is and learn what has changed with the most recent measures taken by the government.

The Tax on Financial Transactions is something you've probably already seen on a bill or at least heard of. Now it's time to understand everything about it and avoid making transactions without knowing you're paying for it.

In this post we will talk about:

• What is IOF?
• What financial transactions are subject to tax?
• When is it charged to the credit card?
• How much does IOF cost?
• What has changed in taxation with the COVID-19 pandemic?

Shall we go together?

What is IOF?

The Tax on Financial Transactions was created by the government with the goal of regulating the national economy. Therefore, this tax is not determined by banks or credit card companies, as many people believe.

It was created back in 1988, and it's worth mentioning that this tax is paid by both individuals and legal entities (yes, companies also pay IOF on their financial transactions!).

Which financial transactions are subject to IOF (Tax on Financial Transactions)?

There are many financial transactions that involve this charge, especially those related to:

Currency exchange: buying or selling currencies from other countries;

→ Insurance: This includes life, car, and general property insurance.

→ Real estate titles

→ Credit

Focusing on the last item on our list, when we talk about credit-related operations, we have to think about modalities such as:

• Personal loan - Here you should always keep an eye on the Total Effective Cost (TEC) value, as it indicates all the charges for credit operations, such as fees, interest rates, and the IOF itself.
• Overdraft facility: in addition to the high interest rates, which we discussed in this article, using an overdraft facility also means paying IOF (tax on financial transactions).
• Credit cards: since they are the biggest cause of debt for individuals in Brazil, we thought it fair to dedicate a separate section to cases where IOF (Tax on Financial Transactions) is applied!

See below:

When is IOF (Tax on Financial Transactions) charged on credit cards?

Not every time your credit card is used will you be charged the tax. There are specific situations in which this applies, such as:

• International purchases : and it's worth remembering that you don't need to be traveling to do this! Purchases made online from foreign websites are more than enough to incur the tax. Purchases made with a credit card within Brazil, in reais, do not incur IOF (tax on financial transactions).
• Paying your credit card bill in installments or only making the minimum payment means carrying over part of the amount to the following month's bill; in the financial world, this is known as entering into revolving credit. In these cases, in addition to the most aggressive interest rates on the market, you will also pay IOF (Tax on Financial Operations).
• Late payment of the invoice also applies.

How much is the IOF tax?

The amount of tax you will pay depends on the type of financial transaction that took place.

Here are some examples of percentages for some of the main operations:

International purchases with a card: 6.38% IOF tax on the value of purchases made abroad with a credit or prepaid card (which, like with a cell phone, requires you to add credit before using it).

Buying and selling foreign currency: the exchange rate we mentioned at the beginning of this text is 1.1%.

Overdraft or revolving credit: in both cases the percentage charged is the same: 0.38% on the overdue amount plus 0.0082% for each day the amount is overdue.

Remember that we're only talking about the IOF tax! Besides all that, there's also interest accruing, so these debts should be paid off as soon as possible.

In either case, the accumulated daily IOF cannot exceed 3% – regardless of the number of days the debt is outstanding.

Loan interest: 0.38% of the loan amount, plus a daily percentage of 0.0082%, calculated according to the total term foreseen for payment.

What has changed in the IOF (Tax on Financial Transactions) with the COVID-19 pandemic?

In addition to measures already taken by the government, such as the release of emergency aid, new withdrawals from the FGTS (Brazilian severance pay fund), and the extension of income tax deadlines, a reduction to zero of the IOF (tax on financial transactions) was announced.

Initially, this measure will be in effect until June 2020 , but it may be extended if the government deems it necessary.

What changes in practice?

If you already have loans in progress, they should weigh less on your monthly budget, since future installments will come without the added tax amount. The same applies to loans taken out within this period.

It's important to remember that evaluating your financial plan is essential before undertaking any financial transaction, even with the IOF reduction.

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