Brazil Tax Gets Booed

Market participants were vigorous in their protests Wednesday against a decision by the Brazilian finance ministry to levy a 2% tax on inbound capital flows, including equity, that pummeled the markets Tuesday. In addition to a chorus from economists, bankers and various representatives of the Brazilian stock exchange, Arminio Fraga, former central banker, chairman of the BM&FBovespa weighed in on the debate with an interview in Estado de S. Paulo that warns of a loss of liquidity. “I think it’s unfortunate they did this,” says Jerome Booth, head of research at Ashmore, which manages around $31bn across EM. “I think it’s linked to the political cycle,” he tells LatinFinance, noting the tax breaks with a trend he sees that might some day allow the BRL to become a reserve currency for central banks. One Brazil-based senior banker says rumors have circulated that taxation on equities may still be repealed and raised for fixed income, given the amount of criticism it has received. “In taxing equities, you’re taxing investments of risk capital, which is not dissimilar to FDI,” says a local banker.