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Brazil’s end to tax on foreign bond buyers is positive move for ETFs, says Rodilosso


Brazil’s Finance Minister has officially eliminated a tax that affected foreign bond buyers, following a number of developments on the international finance stage over the last several months, including a reduction in capital flows into Brazil.

“I believe this change should be viewed as a positive one for investors, though they should still cast a somewhat critical eye on the country’s efforts to improve its economic situation,” says Fran Rodilosso (pictured), fixed income portfolio manager at Market Vectors ETFs. “This tax had indeed been a disincentive for shorter-term plays in domestic Brazilian bond instruments. It has also likely slowed outflows from longer-term holders, as portfolio managers that sold Brazilian issuances may have decided not to repatriate the currency, leaving reals in their local accounts so as not to have to pay the tax again when they decided to buy more bonds.
“It is important to note that this move does not necessarily represent a liberalisation of the Brazilian real. Though the tax on foreign fixed income flows is now at zero percent, it could be raised again. The country is still expected to use capital controls as it deems fit, and other taxes, such as a one percent tax on dividends, still remain.
“I interpret the decision to move this tax from six to zero percent in a single move as a key sign that Brazil’s government and central bank remain highly concerned about inflation, which is already above target and is being compounded by a weakening real.
“Still, the end of the tax is good news for investors looking to add exposure to local currency funds. Inflows into ETFs and mutual funds that hold domestic, local currency Brazilian bonds will no longer be subject to that six per cent tax on the portion of such fund’s holdings that invest in these instruments. On that front, Brazil’s decision is a welcome move.”

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