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Capital controls: Brazil raises tax to stem inflows

Second rise in as many weeks; Analysts sceptical of its effectiveness

Brazil’s double rise in its financial transaction tax (imposto sobre operações financeiras – IOF) in October might not achieve its primary aim of slowing capital inflows and the real’s appreciation but it did add to the appeal of the country’s real-denominated global bond launched last month.

On October 18 the Brazilian government raised the IOF entry tax on portfolio inflows into fixed-income instruments to 6%, just two weeks after it had raised it to 4% from 2%. The move is aimed to stem capital inflows into the country, which have led to appreciation in the real (up 12% since July) and lowered the country’s trade surplus.

By October, Brazil’s year-to-date trade surplus totalled $14.5 billion, compared with a surplus of $22 billion in the same period of 2009. Analysts are expecting Brazil’s trade surplus to remain well below last year’s figure of $25.4 billion. A survey by the Central Bank of Brazil released in October produced an average forecast for the 2010 surplus of $15.9 billion, slightly down from the $16 billion reported in the previous survey.

The government also said it would tax margin deposits on derivative contracts from non-residents at 6% in an attempt to reduce the profitability, and thereby the volumes, of FX contracts.

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