1. Bilateral Loans
  2. Defining Attributes Specific to Loan product
  3. Setting Product Preferences
  4. Specifying Additional Preference
  5. Financial Operations Tax

3.2.11.2 Financial Operations Tax

Financial operations tax also called as IOF is a Brazilian tax applied on some financial transactions. These transactions include foreign exchange, loans, insurance, investments, and securities.

It is applicable for corporate lending operations. It is required to compute IOF based on the principal schedule amount and the period between value date and schedule due date.

IOF Payment Method

You can either select Advance Payment, Capitalization from the drop-down list. By default, nothing is selected.

If you have selected Advance Payment option, then IOF is collected upfront when loan is disbursed.

If you have selected Capitalization option, then IOF is capitalized along with the principal amount.

Note:

  • If IOF payment method is defined at the product level, then this option is not available at the contract level.
  • IOF is applicable for Bearing, Discounted, and True discounted method of loans.
  • IOF is applicable for Normal and Amortized schedule type of loans.
  • IOF commutation available for True Discounted loan methods are limited to loans with bullet payment schedules.
  • IOF is not recomputed or collected during any prepayment related activities.For example, normal prepayment, partial prepayment, pre-closure, and so on.
  • IOF Advance Payment method is applicable for Bearing Normal, Bearing Amortized, Discounted and True Discounted.
  • IOF Capitalization payment method is allowed only for Bearing Normal and Bearing Amortized Loans only.
Accounting Entries
  1. <Component>_AMT accounting entries should be configured for the event DSBR at the product level for advance payment.
  2. <Component>_CAP accounting entries should be configured for the event DSBR at the product level for Capitalization payment.
  3. <Component>_AMT accounting entries should be configured during the event VAMI at the product level.
  4. <Component>_AMT accounting entries should be configured during the event ROLL at the product level for advance payment.
  5. <Component>_CAP accounting entries should be configured during the event ROLL at the product level for capitalization payment.
  6. 6. For Late Payment <Component>_AMT accounting entries should be configured during the event LIQD.

IOF Advance Payment (IOF at concession)

  1. In Advance Payment method, IOF amount must be calculated and collected from the customer in advance.
  2. If moratorium interest capitalization is applicable then IOF must be calculated on principal schedule amounts which include the capitalized interest.

IOF Capitalization (IOF Lending)

It must be possible to capitalize the IOF value to the principal.
In case of IOF lending, the computation must be done in three steps process depending on the formulae maintained for the component.
  1. The IOF needs to be computed on original principal schedule amounts.

    If moratorium period compounding (moratorium interest capitalization) is applicable then principal schedule value should include this also.

  2. The result from the step 1 is used to compute the net IOF value for lending using the below formula.

    [((PrincipalValue×TotalIOFValue))/((PrincipalValue-TotalIOFValue) )]

  3. The result from step 2 is compounded into the Principal. The system must have the ability to support calculation of IOF on late payment.

Apply Book Rate for VAMI

If this check box is selected, then contract booking IOF tax rate it taken instead of VAMI maintained rate.

Limitations

  • Accrual is not applicable for IOF component.
  • IOF computation for True Discounted loan is limited to loans with bullet payment/ disbursement schedule and discounted schedule formula.
  • For a discounted loan, on multiple manual disbursement or principal increase VAMI,IOF is re-calculated considering Principal amount effective from the value date of the loan not from the disbursement/amendment date.
  • There is no impact on IOF as part of status change.
  • Additional rate is not applicable for late payment of principal component.
For more information, refer to Maintaining Financial Operations Tax (IOF) topic in this User Manual.

Parent topic: Specifying Additional Preference