Category: Economy & Policy

Brazilian private equity funds, known as FIPs, are lobbying the government for an exclusion to the recently increased IOF tax. Brazil last week hiked the charge to 6% from 4% to try and contain FX appreciation from heavy cash inflows. However, the ABVCAP local private equity and venture capital association argues that its members should not be subject to the tax, due to the long-term nature of their investments. Ken Wainer, managing principal at VBI Real Estate, says FIPs have to pay the 6% tax upon receipt of foreign funds. This is a heavy burden, he adds, since payment is required before any gains can be realized. A New York-based banker who invests in Brazil says the tax increase will cause a “small slowdown” by foreign LPs investing in PE in the short term. An ABVCAP spokesman says he does not expect any change until after the upcoming elections. If a foreign investor were to invest directly in a Brazilian company without going through an FIP structure they would not be subject to the IOF tax. However, they would get hit by a capital gains tax that can range from 15%-34%, explains Christiano Chagas, partner in Mayer Brown’s Sao Paulo office.

Brazil has again hiked the IOF tax for fixed income investments, to 6% from 4%, in a move that analysts say will dent bonds and FX. Brasilia is also indicating that it will do more to stem the unprecedented inflows of portfolio money seeking relatively high returns in the local bond market. “While markets elbowed the first hike to 4% only 2 weeks ago, this move hits the markets with a considerably more fragile technical position,” says Barclays, which sees a threat to BRL and a sell off in the long end of the local curve. On top of 45bp-35bp in additional yield required to compensate for the IOF jump, it also expects the market to price additional risk premium in the curve to reflect fears of even higher IOF, or other measures, in the future. The IOF tax on BM&F margins will rise to 6.00% from 0.38%. The raise follows an increase to 4% from 2% earlier this month, while the rate for equity inflows remains 2%. “The measures should influence FX and fixed income markets negatively in the coming days,” says Barclays. “This is a bit more comprehensive than just raising the IOF tax in the past as it targets foreigners’ leveraged positions,” says Standard Chartered. However, it adds that the impact will likely be temporary. “The fact remains that Brazil has the highest interest rates in the world, and coupled with the likelihood of further quantitative easing from the Fed and possibly the Bank of England, global liquidity will look to Brazil and other places for yield,” says Standard. “Implementing controls is really just treating the symptoms which can have temporary benefits but does not resolve the underlying issue,” it adds.