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Brazil Removes IOF Tax On Mortgage-Backed Securities

by Mike Godfrey,, Washington

08 November 2012

The Brazilian government has announced a further change to its financial transactions tax, IOF, to prop up demand for mortgage-backed securities.

Under the changes, non-resident investors will be able to purchase mortgage-backed securities, directly or indirectly, exempt from both income tax and IOF, bringing the tax treatment of these investments in line with that of domestic investors. The tax break also applies to certain funds investing in these securities.

The tax break comes after a substantial fall-off in demand for mortgage-backed securities, which are essentially investments in a 'basket' of mortgage loans with returns dependent on mortgage repayments being made. The level of risk and rate of return can be broadly predetermined by the credit risk of the mortgages that have been pooled, and the degree of leveraging of a fund.

To be eligible for the tax break, investors must invest in bonds with an average maturity of at least four years. At least 67% of the capital of the fund must be channelled into new infrastructure investment projects, increasing to at least 85% in the third year.

The Brazilian government has tinkered with its IOF tax multiple times over the past two years, partly to stem the rising value of the nation's currency, the real, but also to stimulate consumer spending and much-needed investment in infrastructure with the nation due to hold the world's two largest sporting events in 2014 and 2016 (the soccer World Cup and the Olympics).

In December 2011, the government exempted foreign purchases of corporate bonds with maturities over four years, and local equities from the IOF, and temporarily cut the rate applicable to purchases of home appliances, to provide targeted stimulus to the local manufacturers.

Then in March 2012, the government introduced a 6% rate of IOF on foreign loans with a maturity period of less than two years to weaken the domestic currency.

Most recently, in August, the government approved an exemption from IOF for insurance policies typically entered into when negotiating infrastructure contracts, which were earlier subject to a 7.38% rate.

TAGS: tax | investment | financial services | tax rates | Brazil | tax breaks | currency | services

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