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Brazil Introduces Tax On Currency Futures

by Mike Godfrey,, Washington

01 August 2011

As its battle against currency appreciation continues, the Brazilian government has introduced a new tax designed to curb the profitability of currency speculation.

The tax, introduced by executive decree, was announced in the country's gazette on July 27. The financial transactions tax (IOF) will be charged at 1% on short dollar positions in the futures market. According to the Finance Ministry, the tax can be hiked to 25% at the government's discretion.

The move is designed to temper any further appreciation of the real. Brazil's currency recently hit a 12-year high against the US dollar, having appreciated against it by 49% since the end of 2008. Finance Minister Guido Mantega explained that the measure was adopted in response to excess dollar selling on the futures market. Mantega stated that speculators have been betting on the dollar's depreciation or the real's appreciation, meaning they profit when this is the outcome.

As a result of the tax, Mantega expects to see a decline in the profitability of such speculation in the futures market. He said that, were such measures not taken, "the exchange rate would be who knows where".

Brazil has made several changes to its IOF regime in recent months, as part of the ongoing struggle against currency appreciation. In May, the government reintroduced the imposition of the IOF on short-term fixed operations in private securities of less than 30 days in duration, which had been suspended in January.

Earlier in the year, Brazil's tax on consumer credit for individuals was doubled from 1.5% to 3%. The rate is paid upfront on the amount borrowed, and applies to various goods bought in instalments over a period of more than one year, and to loans with maturities of greater than a year. Other measures introduced include an increase in the IOF on credit card purchases to 6.38%, a higher levy on foreign investors' fixed income investments, and a larger tax on short-term foreign loans lasting up to two years.

TAGS: individuals | tax | investment | economics | speculation | tax rates | Brazil | United States | currency

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