Brazil Raises Controversial Tax On Financial Movements

Lisa Ugur, Tax-news.com, London

20 March 2001

In a bid to boost revenues to fund a large-scale anti-poverty initiative, Brazil has just raised its controversial tax on financial transactio s (the CPMF). The increase isn't much to write home about, but it has irked some sectors.

The CPMF will rise to 0.38% from 0.30% and will be in place until June 17, 2002. The tax applies to everything from bank deposits and cash withdrawals to stock purchases. The tax was first introduced in 1999 in order to meet fiscal targets set by the International Monetary Fund, but it has been criticised by stockbrokers and investors alike for increasing trading costs and lowering trading volumes on the Sao Paulo Stock Exchange.

The tax brings in around US$7bn for the government each year, and the new increase will see a nearly an extra £2bn flow into government coffers. So the Brazilian authorities are reluctant to abolish the tax, despite the fact that it is widely seen to have a negative effect on the country's financial markets.

There is a call from some quarters for the repeal of the tax in order to make Brazil more attractive to investors. In October, the national monetary committee lifted the CPMF for foreign investors, but according to the Stock Exchange, the move has yet to be implemented for reasons of "bureaucracy".

As already mentioned, the tax is due to fizzle out on its own next summer, although it could be quite easily replaced or extended by Congress. It is predicted that the government may well try and hang on to the tax purely because it provides a means of sniffing out tax evaders. In January, Congress passed a measure that allows the Treasury to use data from the CPMF, which is levied at source, to compare with personal income declarations. It is predicted that whilst the government may well retain the CPMF, it will reduce it to a much lower rate if revenues pick up elsewhere.

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