Brazil Raises IOF Tax
Brazil’s decision to boost the IOF tax again on fixed income foreign investment to 6% from 4% previously, was not a big surprise for the markets. Still, this is a strong statement since it comes just two weeks after it was hiked to 4% from 2%. In addition, Brazil increased the tax on margin deposits on futures markets to 6% from 0.38% previously. Finance Minister Mantega hinted earlier that more tax measures were being mulled, and so the government delivered pretty quickly. The authorities will continue to tinker with its toolbox to find the right combination of policies to curb excessive currency appreciation. The tax on margin deposits appears to be geared towards addressing speculative, leveraged bets on the currency.
Mantega said that there are other measures that can be taken, and that Brazil is trying to limit short-term investments. Given Brazil’s concerns about relying on potentially destabilizing hot money flows, one cannot rule out some sort of lock-up period for inflows if the current measures prove unable to limit the inflows. But ironically, Brazil is very dependent on hot money to finance the current account gap as the basic balance of the past 12 months is a whopping -$18.6 bln. Finally, more and more countries are likely to follow Brazil down this road as they are trying to extract revenue from foreign investment.
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