Banks issuing structured notes (Certificados de Operações Estruturadas – COEs) in Brazil will be required to report on their balance sheets the derivatives that make up each product individually.
The decision was taken recently by the Internal Revenue Service (Secretaria da Receita Federal) and was announced via Normative Instruction (IN) No. 1502, which amended the previous IN 633 of 2006.
Market players welcome the decision as it clarifies an issue that had not been addressed since the regulator approved the products back in January.
“The question was open. There was a big debate about how banks should treat the COE in their balance sheets,” said Ana Claudia Utumi, a partner in the tax practice at TozziniFreire law firm. “The normative instruction by the IRS gives more legal certainty for banks.”
According to Utumi, issuers already involved in the domestic structured notes market such as Bradesco, BTG Pactual, Citi, Credit Suisse, Banco Santander, Safra, and Itaú BBA will be required to adjust their balance sheets.
“Those banks that chose to launch the product as fixed income necessarily have to adjust their balance sheets and report each derivative,” she said.
Flavio Miffano, a partner Mattos Filho law firm, also praised the decision of Brazil’s IRS.
“Considering that COEs can have a wide variety of assets embedded it made no sense to launch as one product only; the option to slice it and include each asset in the balance is more appropriate,” said Miffano. “With this decision, the COE is now more transparent.”
Taxation
The new rules do not affect the taxation applied to individual investors buying a COE, which remains subject to the country’s existing fixed income tax rules. That is, the investment is subject to a regressive rate, depending on the application deadline, going from 22.5% to 15% on income.
“There is no specific rule designed to tax the COE,” added Miffano. “The option was to use the existing rule for fixed income, which I don’t consider the best alternative.”
According to Miffano, tax at source is something simple for investors to understand but may not be ideal for a product such as the COE as it may include fixed income and equity assets combined.
“Some COEs may have periodic payments to investors, which are subject to withholding tax, which is bad,” said Miffano. “For the end investor, the tax at source should be applied at the end [of the investment term] because the end result is already known, but for this you need a specific rule for the COE.”
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