Brazil Combating Inflated Currency with New Tax

July 28, 2011 Taxation in Brazil

New Tax on Brazilian Real TradesThe government of Brazil is using new tax measures to contain the unprecedented rise of the national currency.

On July 27th the national currency of Brazil (the Real, BRL), backed down from its 12 year high against the US Dollar, after the government announced a new tax designed to curb the currency’s excessive appreciation. Immediately after the announcement the Brazilian Real fell by approximately 2 percent.

The newly instated measure will place a 1 percent tax short positions on the country’s futures market valued above BRL 10 million. The rules are intended to defend the currency from upward pressure from speculative activity, while still allowing for the free flow of direct foreign investment, and the use of the futures market for business planning purposes.

The regulation allows the government to revise the new tax rate in the future, based on the effectiveness of the system, and increase the rate up to 25 percent if needed. The government may also set leverage limits and raise deposit requirements for speculative currency trades.

The Brazilian Real has appreciated 49 percent against the US dollar since the end of 2008, and analyst attribute the increase largely to the country’s futures market on the national currency. To combat the overvaluing of the Real, the government has already nearly tripled the taxes applicable to overseas investors purchasing domestic bonds. The levies charged on foreign loans and reserve requirements on short positions have also been raised since 2008.

Photo by markhillary