Tax breaks and high levels of interest rates helped Brazilian investment funds attract a record 39.9 billion Brazilian reals ($18.7 billion) in the first quarter of 2006, the National Investment Banks Association (Anbid) reported last week.
Fixed-income funds led the way in attracting new investors, pulling in a net BRL16.7 billion during the first three months of 2006, helped by a base rate that is currently set at 16.5%.
By comparison, local investment funds attracted net investments of BRL22.2 billion throughout the whole of 2005.
According to Anbid, tax breaks were also a significant factor behind the new inflows. The Brazilian government has exempted foreign investors from capital-gains tax on federal bonds in a move designed to increase inflows of foreign capital and allow the government to borrow more money over longer terms, while also bringing Brazil’s debt market into line with other countries in the region.
The measure means that foreign investors are no longer required to pay the 15% tax on gains from federal government bond trading, a move which Treasury Secretary Joaquim Levy expects to double foreigners’ holdings of local bonds to $10 billion within a year.
The exemption applies only to foreign investment funds holding up to 98% of their assets in Brazilian government bonds and, according to the government, will only be granted to investors who made “definitive” purchases of government securities, not to investors who make repurchase agreements.
The tax break will also not apply to investments made by foreign investors located in what the Finance Ministry deems as “tax havens”.
The new law also exempts foreigners from the 0.38% Provisional Contribution on Financial Transactions, known as the ‘check tax’, which applies on a wide range of transactions from electronic payments to personal checks.
One of the consequences of boosting the amount invested in federal bonds is that it may help the government borrow at longer terms and for lower interest rates. However, the move has also undermined its efforts to depreciate the national currency, the real, which has appreciated by 52% since May 2004. The real hit a five-year high last week shortly after the tax exemption announcement.
It has been estimated that the tax exemption will cut government revenue by about $72 million a year.
Source: OCRA
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