Government extends new IOF

At the beginning of this week the government announced it was doubling the tax on foreigners putting money in fixed income investments [which are very attract due to Brazil’s high interest rate – currently 10.75%; in the United States and Japan, for example, the rate is close to zero] The measure is part of an effort to slow the inflow of dollars (Brazil is awash in them, which drives the value of the local currency, the real, up. That reduces the competitive advantage of Brazilian exports). The surtax, known as the IOF (tax on financial operations “imposto sobre operações financeiras”), was 2% (established in October 2009; before that there was no tax) and is now 4%.

Yesterday, the government announced that the new tax will be levied on other investments by foreigners: specifically, in stock funds (which are not made on the stock market), multimarket funds and debentures.

The reaction to the government’s decision was mixed. According to Carlos Antonio Magalhães de Almeida, director of the Association of Capital Market Investment Analysts and Professionals (“Apimec/RJ”), the fact is that the dollar continued moving downward after the new tax went into effect. Bad news for exporters, he pointed out. And the stock market (Bovespa) marched on, closing above 70,000. “The measure is an attempt to palliate the falling dollar,” said Almeida. “But, the dollar is falling everywhere in the world. This is like trying to cure a bad cough with a cough medicine that is not known as a cure.”

However, Alexis Cavicchini, professor of finances at the Federal University of Rio de Janeiro (“UFRJ”), called the measure an “excellent decision.” He explained that it was the right thing to do because of the strong inflow of foreign capital and the resultant record low in the value of the dollar. As this is a worldwide problem, countries want an exchange rate that will work in their favor, he said.

In other words, they are devaluating their currencies [so they can export themselves out of the problem; the problem, in this case, is what is known in many quarters as “the currency war”]. But Brazil has been doing the opposite, says the UFRJ professor. The real has been rising in value for two years. After this new measure [doubling the IOF] the situation in Brazil has shifted. With real interest rates at 5% to 6%, and an IOF of 4%, plus exchange rate risk, suddenly a fixed income investment in Brazil is not all that attractive any more. “It was a very good decision,” concluded Cavicchini.

Investments in the stock market (Bovespa), futures market (“Bolsa de Mercadorias e Futuros”) and public stock offers (variable income) are still taxed at 2%. Foreign direct investment in Brazil is not taxed.