Thursday, October 22, 2009

Investors Already Find Ways to Invest in Brazil and Bypass New Tax

Brazilian newspaper O Estado de Sao Paulo reports that foreign investors are already finding loopholes to circumvent the new tax over financial operations (IOF). Despite the government measure, most analysts still believe that the Brazilian currency will again gain ground against the U.S. Dollar.

One of the reasons for the skepticism of many analysts about the impact of taxation on fixed income and equities is the sophistication of financial products, which allow foreign investors to circumvent the payment of the 2% Tax, and still obey the law. In the case of equities, there are at least two possibilities:

1. The investor can buy an ADR of a Brazilian company in the New York Stock Exchange (ADR) and convert it into a paper to be traded at the Sao Paulo (Bovespa). Until the government move was announced, no one resorted to this because there was no reason. Now, many may use it, because you do not pay IOF in the conversion.

The investor will only have the expense of conversion of approximately 0.5% of the action. The potential advantage in doing this instead of the investor simply sticking with the ADR (as feared by the Bovespa exchnage) is also the possibility of earning profits from any appreciation of the Real.

2. Another way to escape from the foreign collection is to buy a derivative from a bank in Brazil, which in practice means the purchase of shares. Total Return Swaps (TRS) are indicated mainly for investors who want to participate in initial public offerings of shares. The investor can buy a contract from the bank operator that guarantees the price change for a certain period of time.

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