Originally published in the March 13 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
Concerned with Brazil’s public debt balance, particularly because of the appreciation of the Brazilian real in relation to the U.S. dollar, President Luiz Inácio Lula da Silva has authorized the Ministry of Finance to consider measures to limit the entrance of foreign currency into the country.
The Finance Ministry, along with Brazil’s Central Bank, is considering several alternatives — including some in the tax arena — that may affect not only Brazil’s foreign trade, but also foreign investment in the country. The new measures are expected to be announced within the next few days.
The two main tax alternatives under consideration are an increase of the financial transactions tax (IOF) on exchange transactions and a reinstatement of the withholding tax on foreign investors’ income from public bonds.
The current tax exemption for public bond investments (which previously were taxed at a rate of 15 percent) was introduced by Provisional Measure 281, which was converted into Law 11,312 of June 28, 2006. The law grants a zero rate withholding tax for public bonds, whether federal, state, or municipal. The exemption may be one of the factors that has contributed to the appreciation of the real in relation to the U.S. dollar: The value of public bonds held by foreign investors soared from BRL 7 billion in 2006 to BRL 57.69 billion in December 2007, accounting for 4.71 percent of Brazil’s domestic public debt.
Also under discussion is a waiver of currency coverage for exports (that is, the requirement that exporters bring export income into Brazil). In 2006 Brazil reduced currency coverage for exports from 100 percent to 70 percent, meaning that exporters can leave as much as 30 percent of their export income outside of Brazil.
However, that measure has not been popular among exporters because of additional requirements and conditions imposed by the Federal Revenue Department, including the waiver of bank secrecy for bank accounts held outside of Brazil.
The effect that the measures being considered would have on Brazil’s debt balance is uncertain. With a domestic interest rate of over 11 percent per year, it might be difficult to convince exporters and foreign investors to leave their money outside the country.
David Roberto R. Soares da Silva