Currencies Wars: Brazil Now Seeks Applying Income Tax for Foreign Investment

If the new increased tax on Financial Operations (IOF) does not reach the desired goal of containing the currency appreciation versus the dropping US Dollar, the government is considering sending to Congress a Provisional Measure to end the foreign investors exemption from Income Tax (IR) in government securities.


The decision is urgent because it must be approved by Congress by year's end if it is to come into force in 2011. Under Brazilian law, a change in income tax which results in increase of the tax can only enter into force the following year of its adoption by the legislature.

Government sources revealed that the end of the exemption is one of the measures studied by the government to solve the exchange issues due created by the devaluation of the US Dollar. Its impact is not immediate, but would be medium term. So it has a different from the kind of actions being taken recently, more focused on the short term and which take the financial market by surprise.

Dilemma.

If on one hand the government reckons that this war will not end in the short term and may worsen in 2011, on the other there is concern about the stability of rules for investors, especially for those which come to the country for longer term and are not simply speculators and seeking short term gains.

Another delicate point is the uncertainty regarding the behavior of Congress, which can reject the proposal. It's not a simple matter. This hypothesis has quirks because it involves Congress.

In 2006, when the government decided to exempt foreign capital, after many years of market demands, the justification was the need to stimulate an increase in term length of the domestic debt. Foreign investors traditionally have higher risk appetite and are willing to buy securities with longer maturities. Before this,  investors paid a tax rate of 15%.

With news from O Eztado de Sao Paulo.