Brazil promises to zero IOF on foreign exchange operations by 2029 to join the OECD

The Brazilian government has promised to zero the IOF (Tax on Financial Operations) by 2029 on transactions involving the purchase and sale of foreign currency to unlock its entry into the OECD (Organization for Economic Cooperation and Development).

The measure goes in the direction of greater liberalization of the flow of foreign capital and invisible transactions, instruments that integrate OECD practices in the economic area.

The commitment was signed by Minister Paulo Guedes (Economy), in a letter sent last week to the entity’s board members.

Guedes participated this Tuesday afternoon (25th) in a statement to the press about the OECD’s decision to start negotiations for Brazil’s entry into the entity.

According to him, the promise of cutting the IOF on the purchase and sale of foreign currency was possible thanks to the approval, by Congress, of a law that promoted a series of changes in the foreign exchange market.

“Once the exchange law is passed, I can commit to reducing the IOF tax and we did so. I sent a letter to the OECD last week, which were the last two requirements that were missing,” Guedes said.

“[A nova lei] it then allowed us to sign the pledge; we send our commitment to sign this gradual and designed removal of the IOFs on international flows, which was the last economic requirement that was missing”.

According to Erivaldo Gomes, Secretary of International Economic Affairs at the Ministry of Economy, the waiver calculated with the measure is R$ 7 billion until 2029. He stated, however, that the government’s expectation is that the losses will be compensated with the increase of transactions that the tax reduction should promote.

The invitation for Brazil to formally begin negotiations to join the OECD was approved this Tuesday by the council of the entity, which brings together 38 countries.

Brazil’s formal application to join the OECD took place in 2017. Joining the “rich countries club” is one of the priorities of the foreign policy of the Jair Bolsonaro (PL) government.

In addition to Brazil, the OECD also extended an invitation to start talks on entering the organization to Argentina, Peru, Bulgaria, Croatia and Romania.

OECD members are committed to complying with good practices for the functioning of their governments and economies.

Once the negotiations have started, a negotiation process begins, which should last at least two years. The average for the last members to complete the process was four years.

During this period, Brazil will need to adhere to a series of normative instruments of the entity, in addition to having its candidacy analyzed in about 30 committees.

Even before the negotiation process was formalized, Brazil had already been adopting these rules, precisely to signal its interest in being part of the group. To date, Brazil has adhered to 103 of the 251 instruments.

The IOF reduction is among the obligations to be fulfilled by the Brazilian government.

The forecast of the economic team is to cut rates on four types of operations: inflow and outflow of foreign funds with a stay of up to 180 days (currently taxed at 6%), foreign exchange transactions in credit, debit and prepaid cards for travel to the abroad (6.38%), acquisition of foreign currency or transfer of funds to an account abroad (1.10%) and other exchange operations (0.38%).

The acts to implement these measures are still being prepared by the Ministry of Economy. The last rate is expected to be zeroed in 2029, but some may be abolished before that. The detailed schedule is still under discussion within the government and deadlines may be adjusted.

Confirmation of Brazil’s entry into the OECD still depends on a consensus of the 38 countries that make up the group. They will assess compliance with the instruments provided for joining the entity.

In a statement, the OECD said that details on the accession process of each of the countries will be prepared once the candidates confirm their endorsement of certain values ​​of the organization.

Among them are “preservation of individual liberty; values ​​of democracy; protection of human rights; and open, competitive, sustainable and transparent market economies.”

“[Esses valores] also refer to commitments by OECD members to promoting sustainable and inclusive economic growth, in addition to the objective of combating climate change, including preventing and reversing the loss of biodiversity and deforestation.”

Minister Carlos França (Foreign Affairs), who participated in the statement to the press at Planalto, said that President Jair Bolsonaro has already signed the letter of reply, prepared by Itamaraty.

“Brazil’s accession to the OECD has to do with Brazil’s place in the world, that’s what it’s all about. The idea that we can participate in this forum that will bring us adherence to the best practices of governance, fighting corruption, improvement of public policies and will also bring many benefits to the economy”, stated França.

There was resistance from OECD members to Brazil’s entry.

The biggest objections were raised by France on account of President Bolsonaro’s environmental policy.

However, according to interlocutors, many of the fears raised by the French and other members will be discussed during the negotiating process.

Also according to interlocutors, what truly unlocked the invitation was an understanding reached between the United States and European partners in the OECD.

Americans and Europeans disagreed about the pace of expansion of the organization. While Washington advocated that there be only one accession process at a time, European countries wanted the entry of a Latin American country to be accompanied by the analysis of a European candidacy.

Now, all six candidates have received letters of invitation to start their membership process.

In 2019, then US President Donald Trump publicly stated that he would endorse the Brazilian campaign to join the OECD.

In exchange for obtaining US support, Brazil promised to give up its “special and differential treatment” at the WTO (World Trade Organization), which gives the country longer deadlines in trade agreements and other flexibilities.

Although there was fear in Itamaraty that there would be a reversal of support in the Joe Biden administration, the current US administration maintained its endorsement of the Brazilian candidacy.