Brazil’s government has announced it is to levy a 1.5 per cent tax on Brazilian stocks traded as American depositary receipts, closing a loophole that allowed investors to buy Brazilian shares overseas and avoid a tax on foreign investments in the country.
 
The move is part of the government’s bid to control the real’s accumulation against the dollar, which has been caused by the inflow of capital to Brazil’s securities market - a sign, say lawyers in the country, that their capital markets practices are bouncing back strongly from the downturn of 2008.
 
Pinheiro Neto Advogados partner Daniela P Anversa Sampaio Doria, says she has received a good deal of client interest in the tax since it was announced on Wednesday, though she adds, "not as much as when the 2 per cent tax on inbound foreign investments in the fixed income and equity markets came in."
 
She says the tax on American depositary receipts "does not seem to be a measure aimed at controlling the foreign exchange, but rather at preventing a reduction of liquidity in Bovespa as a result of the earlier tax."
 
Last year, Brazil was forced to lower its financial operations tax (IOF) as its capital markets faltered during the financial crisis. At the time the country’s capital markets lawyers said they were operating at around 20 per cent of their peak level of activity.
 
Although she acknowledges that the real's soaring value is a major concern, TozziniFreire Advogados partner Ana Carolina de Salles Freire, says the government’s subsequent increase in IOF, and this week’s tax, are part of a continuing balancing act trying to maintain capital market strength.
 
"I believe that that the government wants to continue to incentivise the development of our capital markets through direct trading at the stock exchange, rather than through the trading of ADRs in New York," she explains.
 
She adds, "At the same time the government wants to send a message to investors that they should not refrain from investing directly in the Brazilian markets in order to avoid paying the IOF tax."
 
While lawyers feel the threat these tax adjustments pose to their capital markets is very small, Anversa points out that “It is still unclear how long such increased taxation will be in place, and whether IPO transactions will be given favourable tax treatment."
 
Brazil has already seen five IPOs in 2009, including a world’s largest for the year, a US$8 billion offering from Santander’s local operation.
 
Daniel de Miranda Facó of Machado, Meyer, Sendacz e Opice Advogados says, "The capital market has indeed recovered. We have not yet got close to the levels of 2006 or 2007, but the market has certainly reacted favourably to companies that can offer liquidity."
 
DT
 
(Latin Lawyer 20.11.2009)
 
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