Gradual Reduction of IOF Rate on Foreign Exchange Transactions

The Tax on Financial Transactions (IOF) is a federal tax provided for in art. 153, item V of the Federal Constitution. Its function is not merely to collect taxes, but to intervene and regulate market situations, which justifies the ease with which its calculation can be modified.

Regulated by Decree no. 6.306/2007, it may be applied to five distinct situations: foreign exchange operations; insurance operations in general; credit operations; bonds and securities; and operations with gold.

Despite the importance of the tax on credit operations, that is, when financial assets are transferred between legal entities, or between individuals and legal entities, we propose here to comment on the recent changes made in the calculation of IOF on foreign exchange operations.

The IOF tax is charged on foreign exchange transactions upon delivery or availability of national or foreign currency, in cash or a document representing cash, and is calculated on the value in Real after conversion. The tax is due on settlement of the exchange operation and may be charged at a rate of up to 25%.

With a view to promoting greater economic integration of the country into the international community, Decree no. 10.997 was published on March 15, 2022, gradually reducing the IOF rates on foreign exchange transactions. The reduction also confirms the adoption of measures aimed at enabling the country to join the OECD (Organisation for Economic Cooperation and Development).

In the case of entry of funds into the country by way of a foreign loan, even through simultaneous operations, registered with the Central Bank of Brazil and with a minimum average term of up to 180 days, the rate has been reduced from 6% to zero, with the reduction being applied immediately.

The new decree has also regulated the gradual reduction of the tax on foreign exchange transactions for the purpose of complying with the obligations of credit and debit card companies or of cards for international use, in the cases specified therein, as well as on the acquisition of foreign currency in travellers checks and for loading prepaid international cards for journeys abroad. In this case, the rates will be reduced to: 5.38% as of January 2, 2023; 4.38% as of January 2, 2024; 3.38% as of January 2, 2025; 2.38% as of January 2, 2026; 1.38% as of January 2, 2027 and 0% as of January 2, 2028.

The 0.38% rate, currently applicable to foreign exchange operations in general, will be reduced to zero as of January 2, 2029, which in practice will result in a reduction to a zero rate for all operations, thereby enabling the country to be more competitive in the international arena.

The Stüssi-Neves team is at your disposal for any further explanation you may require.

Patrícia Giacomin Pádua

Partner in the Tax Area – São Paulo
patricia.padua@stussinevessp.com.br

A Guide on How to Keep Track of Your Business Transactions

Keeping track of your business transactions is important for several reasons. First, it allows you to see where your money is and what business areas generate the most income. Second, it helps you keep tabs on expenses to budget accordingly.

And third, it gives you a clear picture of your overall financial health. If you have not organised your transactions in the past, now is the time to start.

Here are a few tips on how to get started:

1. Use Business Bank Cards

One helpful tip is to use business bank cards for all of your business transactions. This way, you can easily track where your money is going. Business Bonsai Cash bank card will give you a statement to itemise all of your transactions at the end of the month. The visa card is also helpful as it can be used anywhere that accepts a Visa. This is a great way to see where you spend the most money and what business areas you need to cut back on.

If you do not want to use a business bank card, you can always get a personal credit or debit card with similar features. Just keep track of all your expenses, so you do not get overwhelmed at the end of the month.

2. Use Software

The easiest way for you to keep track of any business transactions done by your company is to use software to do it for you. Software like accounting software can track all the transactions made by your company. With this software, you can easily input all of your transactions, where they will then be sorted and organised for future convenience. No longer will you have to scramble around the office for receipts and invoices as everything will be kept tidy and in one place.

When it comes to using any software, there is a learning curve to understand how to use it fully. But once you have a grip on the software, it will be a breeze to keep track of all your business transactions.

3. Connect Your Bank Account to Software

If you use software to keep track of your business transactions, you can connect your bank account to the software. All of your transactions will be automatically entered into the software. As humans, we are forgetful creatures, and sometimes we forget to input all of our transactions. This is a great way to stay on top of your finances and ensure that all of your transactions are accounted for.

Connect your bank account to the software and let it do the work for you. This is a great way to get an accurate and up-to-date picture of your business finances.

4. Use an Excel Spreadsheet

Another way to keep track of your business transactions is by using an Excel spreadsheet. This method is best for those who are more comfortable with numbers and formulas. You can easily set up an Excel sheet to input and track all of your business transactions. The great thing about using an Excel spreadsheet is that it can be customised to fit your specific needs.

You can also create formulas to help you calculate and analyse your data. If you are not comfortable using software or do not want to invest in any, using an Excel spreadsheet is a great alternative.

5. Receipt Scanners

If you like to keep physical copies of their receipts, a receipt scanner is a great option. You can scan and save all of your receipts electronically with a receipt scanner. This way, you will have a digital copy of your receipt that you can access. Receipt scanners can be purchased for a relatively low price and are easy to use.

Scan your receipts and save them onto your computer or cloud-based storage system. You will never have to worry about losing or misplacing a physical receipt again.

6. Hire an Accountant

If you are struggling to keep track of your business transactions, you may consider hiring an accountant. An accountant can help you keep track of your finances and ensure that all of your transactions are accounted for. Hiring an accountant may be an additional expense for your business, but it is worth it if it means that your finances are in good hands. If you are not comfortable managing your finances, hiring an accountant is a great option. An accountant can also offer you valuable advice on better managing your money.

Keeping track of your business transactions is important for several reasons. You can easily keep track of all the money coming in and going out of your business by following these tips. This will give you a clear picture of your financial health and help you budget accordingly. Do not let another day go by without keeping track of your business transactions.

Transfer Pricing Considerations in Your Post M&A Integration

At the core of any M&A transaction is the fundamental scaling and growth of the integrated business unit at a macro level or tapping into and accessing the potential of the economies of scale of the target entity at a micro level.

As such, parties to the M&A transaction often spend a bulk of the transaction phase considering and negotiating the post-transaction integration of the transacting entities with respect to matters around optimising human resource, fine-tuning management and management functions, shareholder rights, exploitation of intangibles and a business growth strategy.

It is common that the acquiring parties to M&A transactions in Sub-Saharan Africa be entities controlled and managed from different jurisdictions. M&A transactions in Sub-Saharan Africa generally involve off-shore domiciled private equity funds or multinational entities as the acquirers and a local entity as the target. The outcome of these transactions bring the integrated unit or group within the purview of transfer pricing.

Transfer Pricing Basics

The concept of transfer pricing under Kenyan law is provided for under:

  1. the Income Tax Act (Cap 470) (the Income Tax Act);
  2. the Income Tax (Transfer Pricing) Rules, 2006; and
  3. the respective double tax treaties that Kenya is a party to.

In addition to these laws, the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations provide persuasive guidance on the application of transfer pricing principles in:

  1. the preparation of transfer pricing policies for taxpayers;
  2. which jurisdiction taxing rights lie; and
  3. dispute resolution between taxpayers and tax authorities.

At its most basic, transfer pricing may be defined as the concept whereby a fair price is determined for transactions amongst related entities of different tax residency. From a taxation context, the transfer price will affect the accounting profits of the respective entities and subsequently the taxable profits of each single entity. Section 18 of the Income Tax Act provides the basis for transfer pricing as follows:

“Where a non-resident person carries on business with a related resident person or through its permanent establishment and the course of that business is such that it produces to the resident person or through its permanent establishment either no profits or less than the ordinary profits which might be expected to accrue from that business if there had been no such relationship, then the gains or profits of that resident person or through its permanent establishment or from that business shall be deemed to be the amount that might have been expected to accrue if the course of that business had been conducted by independent persons dealing at arm’s length.”

For Ease of Explanation:

The transfer price set for the transfer of products from Entity 1 to Entity 2 will not affect the group’s overall/combined profit but will affect the taxable profit of Entity 1. Therefore, where Entity 1 is located in a relatively higher tax jurisdiction, there is incentive within the group to reduce the transfer price in order to decrease Entity 1’s taxable profit in that high tax jurisdiction.

M&A Context

Following an M&A transaction the following factors tend to materialise within the integrated entities:

  1. The adoption of minority rights by the acquirer. This typically occurs where an acquirer acquires a significant minority of the target entity and obtains control in the target business and is a common acquisition strategy adopted in private equity transactions.
  2. The integration of intangibles such as intellectual property rights and goodwill. Intellectual property rights of the integrated group may be farmed out from one jurisdiction to another or assigned over various jurisdictions.
  3. The post-transaction financing of the integrated group taking the form of shareholder loans spread across multiple jurisdictions.
  4. The integration of a new management group or the involvement of the acquiring entity’s management group in the affairs of the target entities and the centralisation of certain functions such as procurement.

Inter-company agreements from the legal and commercial foundations of these post-transaction matters and relationships. Consequently, there is the natural possibility of complex financial flows between these group entities which would affect the tax base in each respective jurisdiction.

A post-transaction transfer pricing analysis allows for the optimisation of the group’s tax strategy to achieve the most efficient and fair tax structure and is achievable by taking the following steps:

  1. Preparation of the inter-company agreements: being the core document establishing the legal and commercial relationship between related entities, it is vital that these agreements clearly define the roles of each party and delineate the respective group transactions.
  2. Internal restructuring: this involves the reallocation of group entity roles, the movement of real and intellectual property ownership and reorganisation of senior management.
  3. Reallocation of commercial risk: this involves the identification of economically significant risks and the contractual or transactional reallocation of these risks to group entities that are able to absorb the risk for the benefit of the integrated group.

Together, these steps would provide for a conclusive functional analysis of the group and subsequently provide an opportunity to adopt the most appropriate transfer pricing methods with a view towards tax optimisation of the entire group.

Whereas this write-up provides a brief overview of the salient issues to consider in your post M&A transfer pricing considerations, parties to M&A transactions ought to keep these factors as talking points at the negotiation stage of the M&A transaction on a specific and case-by-case basis.

Conclusion

Transfer pricing considerations play a vital role in the success of post-M&A integration. By adhering to compliance regulations, adopting an arm’s length approach, and optimising your content for marketability, SEO, education, and fascination, you can navigate this complex topic effectively. Remember that transfer pricing is not merely a technicality but a critical factor in achieving seamless and profitable post-M&A integration.