Originally published in the June 4 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
The Brazilian financial transactions tax (IOF) increase has caused foreign investors to flee from Brazilian public bonds.
The IOF increase has provoked a sharp drop in foreign investments in Brazilian public bonds, and the effects have been far more serious than the government originally expected. The government had expected a drop in the purchase of short-term bonds, but the IOF increase has also affected long-term bond investments.
In April, foreign investments in public bonds totaled $230 million, only 5.5 percent of the $4.27 billion destined for public bonds in March, according to Brazil’s Central Bank. Short-term bond investments dropped from $995 million in February to $137 million in March and to $18 million in April.
Presidential Decree 6,391, published in Brazil’s official gazette March 13, increased the IOF from 0 percent to 1.5 percent on exchange transactions destined to fixed-income investments by foreign investors. At the time, a series of changes to IOF were created allegedly to stall the appreciation of the Brazilian real vis-à-vis the U.S. dollar.
The increase applied to exchange transactions carried out by foreign investors for investment in Brazilian financial and capital markets. Exceptions applied to investments in the stock markets, commodities and future markets, initial public offers, or subscription of shares, meaning, in practical terms, it applied to virtually all fixed-income investments.
The government believed long-term investments in public bonds would not be affected because in the long run, the impact of the 1.5 percent IOF would be diluted: With the basic annual interest rate at 11.75 percent (approximately 1 percent per month), a short-term investment in public bonds would no longer be viable, while long-term investments would be affected in terms of overall profitability but still be viable and somewhat attractive (considering the potential for interest increases in the near future). But it seems investors do not agree with the Brazilian government’s rationale.
David Roberto R. Soares da Silva