DCM bankers watch with envy as Brazil’s equity tax is scrapped

The Brazilian government on Thursday scrapped the levy on international investors’ equity investments. The Bovespa index rose by nearly 2% in the hours after the announcement. However, the 6% tax on foreign investors’ acquisitions of fixed income assets remains in place.

The government had introduced the IOF tax two years ago to try to stem the flow of short-term money into the country, which it saw as leading the appreciation of the Real and the lowering of the competitiveness of its economy’s industrial base. Concerns about the Real have eased as the currency had dropped 13% against the dollar during the past four months.

The move has heightened hopes that similar cuts on fixed income investors could follow, while at the same time producing frustrations at the delay – if, indeed, the central bank is sequencing its reform of the IOF. 

Jean-Dominique Bütikofer, head of EM fixed income asset management at UBP in Switzerland, told a LatinFinance conference on Thursday in São Paulo that changes to the IOF levied on international fixed income investors should now be a government priority:

“The currency movement is far more related to equity investment than for fixed income and it makes no sense to decrease the IOF for equity and not for Fixed Income.”

Antonio Oliveira, SVP of debt capital markets in Brazil for HSBC, suggested the changes to the IOF tax on equities will have little impact:
 

“Now is the time for Fixed Income investment – it is not the time for equities. It is not a positive environment for equities and won’t be for the coming years.”

It was left to Fernando Garrido, head of public debt operations at Brazil’s National Treasury, to defend the government’s discrepancy in tax treatment regarding international equity and debt investors. While he admitted the current IOF on fixed income “created something of a distortion in the market”, he said:
 

“It is harder to distinguish between the short-term and long-term investor in fixed income [than in equities] and the 6% fixed-rate tax is diluted [over the investment life] for long-term investors – becoming less punitive in the long run.”

- Euromoney Skew Blog