June 06, 2004 | By Keith Martin in Washington, DC

BRAZIL set off a controversy about its financial transactions tax.

Brazil collects a tax of 0.38% on financial transactions. The tax is called the CPMF and is levied on funds withdrawn from a bank account and transferred to a third party. A “provisional measure” issued on April 2 by the
government has Brazilian banks up in arms because of two changes in the scope of the tax.

To date, Brazilian companies that export their products had been able to borrow against the expected export earnings without paying the CPMF tax on such borrowing. The loan is repaid to the banks directly by the importer, thereby avoiding the CPMF that would have been levied if the money passed through the exporter’s bank account, according to Ana Karina de Souza and Camila Silva with Machado, Meyer, Sendacz e Opice
Advogados in São Paulo. The April 2 provisional measure requires exporters to repay such loans from their own bank accounts. Thus, a tax would have to be paid as the loan is repaid out of the export earnings.

Brazilian companies buying goods or services from suppliers often avoid CPMF tax currently by borrowing the money needed and instructing the bank to pay the loan proceeds directly to the supplier. This avoids an extra
CPMF tax by bypassing the supplier’s bank account. However, after the April 2 provisional measure, such loans must be deposited in the borrower’s bank account, with the result that he will not be able to avoid CPMF while paying his suppliers. 

The new rules are scheduled to take effect on August 1.