Brazil Slaps 6% Tax on Foreign Investors to Reduce Speculators’ Appetite

Paulo Skaf While the Brazilian currency real keeps on appreciating against the American dollar, Brazilian minister of Finance, Guido Mantega, announced two more measures in an effort to reinforce de greenback. The financial transaction tax (“IOF”) on foreign investments in fixed income, which are attracted by Brazil’s basic interest rate of 10.75%, has been raised again, this time to 6%.

The government had already doubled it from 2% to 4% on October 4. The government also announced it was increasing the IOF marginal guarantee aliquot on foreign investments in futures markets from 0.38% to 6%.

According to the minister, the objective was to “reduce the appetite of the short-term investor.” Speculative capital will suffer the most from these measures, he said.

Mantega added that he did not rule out further measures. “We just have to be careful with the dosage – it cannot be excessive,” said the minister, as he elucidated his plan to attack the problem gradually, on various fronts.

However, he said, a definitive solution for the currency war would depend on an international agreement. “Eventually, we are going to have to find a joint solution.”

Meanwhile, on another front, the Central Bank continues to buy dollars on the open market. So far this year the dollar has fallen 4.42%, closing yesterday at 1.666 reais.

Paulo Skaf, the president of the Industrial Federation of São Paulo (Fiesp), Paulo Skaf, says that the measures adopted by the government to stem the devaluation of the dollar are insufficient. Skaf called for new action that would halt the loss of competitivity plaguing Brazilian companies because of the declining value of the dollar.

“The increase in the Tax on Financial Operations (IOF) for foreign investors helps, but it is not enough to resolve the exchange rate imbalance,” declared Skaf.

Skaf said the government could help manufacturers by speeding up the payment of tax credits that exporters have difficulties getting their hands on. “This is a good moment, with the appreciation of the real, for the government to comply with the rules and pay exporters what they are due,” he said.

Skaf went to say that the exchange rate problem had consequences in trade and the domestic market. “Exporters struggle to export and the domestic market has to compete with cheap imports.” He pointed out that foreign trade numbers already show the loss of competitivity.

“Brazil is going to rack up a US$ 60 billion deficit in manufactured goods by the end of this year. The only surplus we have is in commodities,” he lamented.

Skaf says it will insist that a tax reform bill should be a priority for the new government that takes office on January 1st and the bill should be sent to Congress during the first half of 2011. Fiesp goes on to say it wants the candidates to commit themselves to getting a vote by the middle of next year.

The Fiesp president also announced that the president elect will be invited to a Fiesp congress on November 9 at which time the organization intends to demand a commitment from the new president for tax and other important structural reforms.

“Reforms you do at the beginning of an administration. That is why we want a commitment now from the next president to implement structural reforms in the first half of 2011,” said Skaf.

“As for taxes in Brazil, we have taxes that are not only expensive, they impede growth. We have taxes that are expensive to collect, expensive to pay, hard to oversee and taxes that create regional distortions. We need reforms of labor laws, we need investments in health, education and security,” he concluded.

ABr

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