Brazil Doubles Tax On Inward Investment

by Mike Godfrey, Tax-News.com, Washington

06 October 2010

Guido Mantega, Brazil’s finance minister, has announced an immediate doubling of its financial transactions tax (IOF) to 4% on new inward investments in fixed income instruments.

Mantega wanted to prevent further appreciation of the currency but emphasized that the increase did not apply to investments in equities or foreign direct investment in the “real economy”, all of which had been subject to 2% tax since October 2009.

Mantega has described the current market situation as an “international currency war” as Brazil’s high interest rates attract capital from the low interest rates current among the developed economies.

The Brazilian Real has gained 36% since the beginning of 2009, and 100% since President Lula took office in 2003, and is considered by many economists to be among the most over-valued in the world. As central banks in Chile, Peru and Colombia have taken action to buy dollars to depress their local currency values, Mantega expressed a preference for more concerted action in order to avoid a trade war.

Economic commentators have expressed doubts about the effectiveness of the tax, since investors can use derivative investments to support their speculation in the real without actually bringing foreign currency into Brazil.

Recommended