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Brazil imposes 2% tax on foreign capital inflow for Equities and Fixed Income

SAO PAULO (Dow Jones)–Brazil will impose a 2% tax on foreign capital inflows toward equities and fixed-income investments in an effort to slow the ongoing appreciation of the country’s currency, the real, Brazilian Finance Minister Guido Mantega said Monday.

Mantega said the government plans to levy the country’s IOF Financial Operations Tax on incoming foreign investment beginning Tuesday.

The Minister said the tax was not aimed at raising government tax revenues, but curbing excess capital inflows that have pushed up the value of the real and hurt the country’s foreign trade balance.

Brazil’s currency has appreciated more than 35% against the dollar so far this year under the impact of a faster-than-hoped for local economic recovery and increasing investor appetite for Brazilian assets.

Source: DowJones News Wire, 19.10.2009

News Summary:

SAO PAULO, Oct 19 (Reuters) – Brazil unveiled plans on Monday to tax capital inflows heading to fixed-income investments and stocks in a bid to prevent the country’s hard-charging currency from strengthening further. Finance Minister Guido Mantega said the government will charge a 2 percent financial transactions tax on foreign investment flows to Brazil’s stock market and local fixed-income securities such as government bonds. [1] The tax, which will take effect on Tuesday, will be charged only once, when the capital enters the country, Mantega said. He stressed that foreign direct investment would continue to flow freely into Brazil, untaxed. “Our concern is with excessive speculative investments, short-term capital that could cause a bubble,” Mantega told reporters in Sao Paulo, where he outlined the measure after meeting with President Luiz Inacio Lula da Silva, who had initially opposed the tax. “Nothing changes with respect to foreign direct investment,” he added.[1]

SAO PAULO (Dow Jones)–The Brazilian real closed slightly weaker against the U.S. dollar Monday on market worries about possible tax changes that might diminish foreign investment inflows.[2] Unlike in the past, however, foreign capital flocking to Brazilian stocks will also be taxed. The measure aims to put the brakes on Brazil’s currency, the real, which has gained a whopping 36 percent against the U.S. dollar so far this year as foreign investors have shifted money to high-yielding emerging markets. Brazil’s stock market has also been a magnet for foreign investment this year, helping lift the benchmark Bovespa index 79 percent since the start of the year.[1] The rate of the levy — 2 percent — was larger than expected, which could have a negative impact on the market in the near term, RBC Capital Markets said in a research note. It is unclear if the measure will ultimately staunch the flood of foreign money into Brazil, whose robust economy and red-hot capital markets have made it a favorite with investors around the globe. Economists note that the real’s surge this year is partly the result of a weaker U.S. dollar globally, a trend that is beyond the control of Brazilian policymakers.[1]

Direct investment in the productive economy will not be affected. The move, announced shortly before local markets closed on Monday evening, is designed to slow the appreciation of Brazil”’s currency, the real, which has gained 36 per cent against the U.S. dollar this year.[3]

Brazil’s real, among the world’s fastest-climbing currencies, dipped against the dollar Monday on investor expectation that the levy would be imposed. The real has gained about 35% against the dollar this year.[4]

Analysts expect solid demand for the local notes, given recent optimism surrounding Latin America’s largest economy. Brazil emerged from recession in the second quarter of this year, with 1.9 percent growth, making it one of the first countries to come out of the global financial crisis.[5] Currently, only non-financial companies in Brazil are allowed to issue the notes, known locally as debentures. “We are likely to authorize the issuance of local notes already this week,” the source told Reuters. The government expects this will help increase the availability of credit, reduce banking spreads and reduce the need for banks to tap markets abroad, the source added.[5] BRASILIA, Oct 19 (Reuters) – Brazil’s government is likely to authorize banks to issue real-denominated domestic debt to raise capital as early as this week, a source at the Finance Ministry told Reuters on Monday.[5]

Mantega said the central bank would keep buying dollars on the spot market to bolster international reserves, which have surged to an all-time high of $232.3 billion. Some economists said the government could have adopted other measures to halt the real’s appreciation, such as cutting public spending and lowering import tariffs on capital goods, which would increase demand for U.S. dollars.[1] Brazilian Finance Minister Guido Mantega said Monday the government plans to levy an “IOF” Financial Operations Tax on incoming foreign investment beginning Tuesday.[6] SAO PAULO (Dow Jones)–Brazil will impose a 2% tax on foreign capital inflows toward equities and fixed-income investments in an effort to slow the ongoing appreciation of.[7] SAO PAULO (Dow Jones)–Brazil is imposing a new tax on foreign portfolio inflows into fixed-income and surging equities markets in a bid to cool the red-hot appreciation of the country’s currency, the real.[6]

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“With our currency overvalued, we’re going to export less and we’re going to be less competitive,” Mantega said, noting that 25 percent of Brazil’s industrial output is shipped to foreign markets. [1]

Asked about the measure in Sao Paulo, Finance Minister Guido Mantega confirmed the government was studying the move and said it would be announced “once it is mature.”[5]

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To view or change all of your email settings, visit the Email Setup Center ]] Email Setup Center. [7] The levy resurrects a financial transactions tax on fixed-income investments the government scrapped last October, when the global credit crisis took a turn for the worse and investment flows dried up.[1] “We’ll continue to encourage foreign investment. Foreign investors are welcome, and they’ll continue to come.”[1] The move aims to curb “excess capital inflows” that have pushed up the value of the real, hurt the country’s foreign trade balance and threatened local jobs.[6] The measure would increase the options banks have to raise funds in domestic markets and in local currency, avoiding the risk of a fluctuating exchange rate, the source said on condition of anonymity because the measure has yet to be unveiled.[5]

SOURCES

1. UPDATE 3-Brazil taxes capital inflows to brake real’s surge
2. Brazil Real Closes Weaker On Possible Tax Changes – WSJ.com
3. FT.com / Americas – Brazil imposes 2% on capital inflows
4. Brazil’s Foreign Levy Aims to Cool Hot Real – WSJ.com
5. UPDATE 3-Brazil to allow banks to sell local notes – source | Reuters
6. UPDATE:Brazil Slaps Tax On Fund Inflows To Check Real’s Gains – WSJ.com
7. Brazil’s Mantega: Govt To Levy 2% Tax On Foreign Investment – WSJ.com
8. IMF Official: Inflow Taxes Like Brazil’s Tend To Be Porous – WSJ.com

Filed under: BM&FBOVESPA, Brazil, Exchanges, Latin America, News, , , , , , , , , ,

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