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To Curb Speculation Brazil Reverses Course and Taxes Foreigners Who Buy Stocks

Stack of Brazilian currency, the real Foreigners investing in Brazil will pay a 2% tax on Brazilian real denominated, fixed-income securities and on purchases of stocks. The measures are being taken by the Brazilian government "to avoid an excess speculation in the stock market and in capital markets,"  Finance minister Guido Mantega told reporters this Monday, October 19, in São Paulo, southeastern Brazil.

The real has gained 35% since the beginning of the year and 5.3% in the past month alone. The strengthening of the Brazilian currency has also pushed other Latin American currencies closely linked to Brazil through trade and investment.

The Brazilian central bank started purchasing dollars on May 8 in a bid to temper the real gains. The currency weakened 0.5% to 1.7177 per U.S. dollar on Monday.

The announcement reverses last year's decision to end such taxes. In October 2008, President Lula da Silva eliminated a tax, known locally as IOF, of 1.5% on foreign investments in certain financial products and of 0.38% on foreign-currency loans.

"Excess global liquidity could lead to an over-appreciation of the Real," Mantega said. That would threaten to hurt the country's exporters and further fuel demand for imports. "We don't want short-term speculation, we don't want exaggerations".

Mantega said the measures may not lead the Real to weaken, but are designed to slow its appreciation and prevent the creation of bubbles in Brazilian markets. "These are to prevent excesses," he said.

Latin America's biggest economy has rebounded from its first recession since 2003, powered by local demand. Industrial production expanded in the past eight months, companies resumed hiring and retail sales have returned to pre-crisis levels GDP after contracting in the last quarter of 2008 and first quarter this year, expanded 1.9% in April-June from the previous quarter.

Mantega has said the Brazilian economy can grow 5% next year.

Brazilian central bank President Henrique Meirelles said in an interview last week that emerging-market currencies that have been appreciating as economies recover from a global recession may become volatile as markets overprice assets.

Central banks need to "alert investors and markets of the risks of exaggeration in the formation of prices, which can lead to future corrections and create unnecessary volatility" Meirelles said in the interview in New York.

The Sao Paulo stock exchange, Bovespa index rose 1.9% Monday and is up 80% so far this year. Brazil's international reserves have risen by 26.1 billion US dollars this year to 232.2 billion USD on October 16, according to data compiled by the central bank.

Mercopress

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  • Show Comments (10)

  • ch.c.

    To the Guest !
    Sorry but you are mixing up !
    the US 15 % capital gains tax in on GAINS ONLY ! that you can compensate with your losses !

    the 2 % Brazil tax is on purchases. REGARDLESS if your sales will generate a profit or a loss. and thus cant be compensated.

    Now lets imagine one is a trader and will churn his capital 10 times in a year (MANY traders churn a lot more than that….by the way). Also assume that in a calendar year a trader generates, lets say 30-40 % profits.
    thus the 15 % is on the net profits only, or between 4,5 – 6 % of his capital ! Right ?

    Now such a trader will have to pay 10 x 2 % or 20 % of his capital….regardless if he earns ZERO – MINUS 20-30-40 % – or PLUS 30-40 % !

    Whoaaaaa…what a difference.

    And that doesnt include if the trader goes ON MARGIN ! because then it is multiplied with their 2 %. Not with 15 % on net profits…by definition !

    TRIPLE…MY GOD….NOW !

    ASSUME NOW, FOR HALF A SECOND THE MARGIN (LEVERAGE) LOOSES MONEY !!!!!

    OOHHHHH MY….OHHHH MY !

    NET trading losses could now add an ADDITIONAL 30-40-50 % losses due to the X number of times of this 2 % tax !

    DO YOU CATCH ME ?

    Better yet :
    In the world of traders there are those called SCALPERS. Meaning getting in and out for just a few cents profits or loss per share-
    Those churn their account easily 300-400-500 times a year not even on margin. Meaning even more when on margin since ALL
    SCALPERS on earth are WITH LEVERAGE !

    Now they will have to pay 300-400-500 TIMES 2 %, regardless if all their trades end up profitable or not !
    Multiplied by their average leverage !

    thus on, let say, a million dollar account they could easily be subject to many many many times their 1 million dollars… ONLY with this 2 % tax…if you understand what I am saying !

    Or said otherwise : FORGET THESE TRADERS TRADING THE BRAZILIAN MARKETS !
    Sad for the traders. But they will trade…ELSEWHERE !
    Even far more sad for the brazilian financial workers…..by definition !

    Killing the golden eggs is a Brazilian Specialty !

  • ch.c.

    laughs….laughs….laughs !
    And see how the World applauded the Mantega (or whoever) smart choice

    Bloomberg :
    “Brazilian Stocks, Currency Tumble on Tax on Foreign Purchases”

    Details of the article are not important because they dont go to the points I stated in my previous thread.

    Except :
    – “investors will figure out ways to bypass the tax ” And there are many ways as I stated !
    – “BM&FBovespa SA plunged as much as 14 percent on speculation the tax will curb trading at Latin AmericaÀ¢€™s biggest bourse”
    Wellllll just re-read what I said earlier of how “happy” will be YOUR financial industries having foreign clients. Go more away.
    Liquidity is elsewhere too even for Brazilian shares.

    Last but not least :
    – have you all a short memory that earlier LAST YEAR a similar tax was imposed. Yessssss a 1,5 % tax but did not cover equities !
    Now 2 % and includes equities !!!!!
    Guess what happened only a few months later ? TAX WAS SCRAPPED !

    Thus in my humble view that 2 % tax WILL BE SCRAPPED TOO !

    Finally and once more…..VIVA BRAZIL….THE WORLD BEST IN AUTO-GOOOOOOOAAALS !

    If Brazilians were smarter than they are they would have charged….
    – a smaller tax…TO ALL. And not one large tax…to foreigners only. the UK have such a tax for yearsssssssss.
    0,45 % TO ALL purchases regardless of the investor nationality, foreign or local !
    And this has Not PENALIZED them in anyway ! Tax still there ! and will remain there for decades…probably !

    But I know how Brazil is so unfair toward FOREIGNERS ! Just re-read my hundreds comments on that subject.
    You charge far more your imports that developed nations but then still complain that our imports taxes are WAY TOO HIGH !
    EXAMPLE : YOU DONT WANT TO IMPORT FOREIGN CARS THUS CHARGE 100 % IMPORT TAX. Thus OBLIGING foreign car makers to produce cars….IN BRAZIL !
    Developed nations should then reciprocate : you want to sell ethanol ? No problem ! iNVEST AND PRODUCE IT….IN DEVELOPED NATIONS ! SAME FOR COFFEE (;-)) ! Up to Brazil to invest not only in developed nations, but also in R&D to find out the coffee seeds that will grow in OUR countries. Have the Monsanto, Syngenta, etc not done so…for Brazilians grains ?
    Yesssss they did ? Why dont you ?

    Lets face it…..BRAZIL IS TOTALLY DEPENDANT OF DEVELOPED NATIONS TECHNOLOGIES, R&D, AND MONEY !
    Not the other way around !
    Developed nations have produced cars for decades. Not so yet in 2009 in Brazil.
    Developed nations have produced grains, cattles, chickens, swines, even sugar, breads, trucks, harvesters, pesticides, meds, steels or steels mills, oil refineries, timbers, even toilets ( ;-)), shampoos, soaps, just to name a few etc etc etc…… many decades or more before you even started !

    Everything you use TODAY was NOT DEVELOPED BY BRAZILIANS……SCIENTISTS, RESEARCHERS, OR PRODUCED BY BRAZILIANS MANUFACTURERS…INITIALLY !
    And you still dont produce PC parts. You just assemble…parts….manufactured elsewhere such as in China, but developed by developed nations !
    YOU ARE EONS…BACKWARD !

    Brazil is developed nations gardeners. That is all !
    China is developed nations blue collars workers. That is all !
    Eventually in the years ahead we will prefer Asians maids, and no longer Latin Americans.
    Philipinos are good and trusted workers. Better than Brazilians…..FOR SURE !

    Be careful in your analysis and too easy conclusions !
    Developed nations are NOT YOUR COMPETITORS !
    YOUR Competitors are ASIANS COUNTRIES !
    And they already easily beat you hands up, hands down, hands in the pocket, or with fingers in their nose….
    IN TECHNOLOGY, EDUCATION, INFRASTRUCTURE, MANUFACTURING…AND IN LABOR EFFICIENCY & PRODUCTIVITY !

    But dont worry, developed nations wont let Brazil or South America down !
    Our exports are Your imports. Our imports are Your exports !

    The Chinese President said once….for one Airbus or Boeing…..China needs to produce 800 millions socks !

    And Ch.c, President of Nowhere, already told Brazil….ONE ROLEX against many many tons of iron ore, or grains !
    Guess who needs the most oil for production and transportation. Guess whose workers earn the most….whatever happens !

    😉 😉 😉 😉 😉

  • ch.c.

    asp “does this affect wire transfers from foreign countries ?
    …..will pay a 2% tax on Brazilian real denominated fixed-income securities and on purchases of stocks.

    therefore the answer to your question is Noooo !

    I cant stop laughing on the news, because if Brazil wants to issue government or corporate bonds IN LOCAL CURRENCY FOR FOREIGN INVESTORS, the 2 % TAX
    will be figured out by professional investors who will request a higher yield FOR COMPENSATION !

    THAT SIMPLE !

    BUT….BUT….BUT…it wont be a straight 2 % higher yield, let say from 12 to 14 % !
    the 2 % higher yield will be steep (straight 2 % more yield) on a short term borrowing, less for a mid term bond and even less on a let say 10 years bond. Because these 2 % added yield will be smoothed in what is called the Yield Curve !

    THAT SIMPLE !

    Therefore who will end up paying these 2 % ?

    THE BORROWER….NOT THE FOREIGN INVESTORS !

    Just think about it !

    THAT SIMPLE !

    For local stocks….that is different !
    – for your largest companies why trade them in the Bovespa when one can already trade them in the USA ?
    Better yet even BEFORE this 2 % TAX – WHY TRADE IN THE BOVESPA at a HIGH COMMISSION COST – when trading
    these same shares in US$ do cost a fraction in commissions.
    – With this 2 % new tax, foreigners have now even less incentive to trade in the BOVESPA….by definition.

    Doubtful that your people in financial industries with foreign clients DO APPRECIATE the gesture of your government decision.
    MORE TRADE (BUYING-SELLLING SHARES) WILL GO OUTSIDE….BRAZIL AND THE BOVESPA !

    THAT IS A TYPICAL BRAZILIAN AUTO-GOOOOOOAALLLLLLLLLLL !
    THE ONES FOR WHICH BRAZIL TRULY…..EXCEL !

    THAT SIMPLE !

    jUST THINK ABOUT IT IF YOU CAN CATCH WHAT I AM SAYING !

    the liquidity in large brazilian company shares is already there…in the USA !
    Even now, before this 2 % tax, often there is more liquidity (value of shares traded) in the USA for Brazilian shares than
    in Brazil !
    And more market share will be lost in the BOVESPA with the new 2 % tax…by definition !

    😉 😉 😉 😉 😉 😉 😉 😉 😉 😉 😉 😉 😉 😉 😉 😉 😉 😉 😉 😉 😉 😉 😉 😉 😉 😉 😉

  • Leo Bonneville

    On the Rise..
    Very smart with the 2% tax.. These investors wanna make a quick buck and bail on Brazil to a safer Market.. haha

  • João da Silva

    ch.c
    [quote]Thus in my humble view that 2 % tax WILL BE SCRAPPED TOO ! [/quote]

    It must be quite hard for you to be so humble. 😉

    BUT…BUT… I don’t think that 22.5% tax on the gain on Savings a/c will be scrapped (over R$50,000). As usual, the Brasilians will be screwed. 🙁

    BUT…BUT.. to make up for all the “losses”, we may have a new tax called CSS.Pay attention. 🙁

  • Phillip L Thoreson

    This tax only applies to money invested in Brasilian stocks and bonds. It is similar to the tax whch was in effect a year ago, but is now 2.0% instead of 1.5%.

    I applaud Brasil for doing this – AS A SHORT TERM MEASURE ONLY. The money which has been flowing into Brasilian bonds and the BOVESPA is largely short term “hot” money (and carry trade, which is borrowing huge sums of money at near zero interest in the US (formerly Japan), and investing in things like Brasilian bonds at 7%, a virtual risk free return of probalby 5.5-6% net, which only the “big boys” like Goldman Sachs get to do) which only serves to run up this market like the current US market bubbles (foreign investment is the single largest component of the BOVESPA), then exit suddenly and the market falls hard, harming Brasilians who actually thought their market was going up for some reason other than Bernanke flooding US banks with dollars they refuse to lend.

    Foreign dollar investment, and IPO’s such as the Santander IPO priced in dollars, has been driving the Real higher against the dollar, costing exporters (this is an exporting nation) to suffer and forcing the Brasilian central bank to buy billions of dollars in the market to avoid a Real at par with the dollar. Enough of Bernanke and his frauds, saying on the one hand that a strong dollar is in the best interest of the US, but then flooding the world with dollars last year to soften the blow from the extreme risk and idiocy of foreign banks and central bankers (Brasil received money, but really only needed it to bail out the hot money market speculators).

    Longer term, however, this tax is not good for Brasil. Brasil needs foreign investment to grow and develop. Penalizing those who seek to invest here should not be a long term response to this hopefully short term problem.

  • The Guest

    And more market share will be lost in the BOVESPA with the new 2 % tax…by definition!
    Yep. I would rather pay 15% capital gains tax in the US than 2% in Brasil. At the end of 2010 when it rises to 20%, I will continue to have a preference for the US. By the way, included in my preference for investment in the US is the low rate of my return that I will receive on those investments. What a concept.

  • asp

    thanks ch c !!
    for the info i wanted and your info on the statistics

  • asp

    does this affect wire transfers from foreign countries ?
    if it does….fuck me

  • Bo

    Put another barrier…
    to foreign investment….just what brazil needs. 😥

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