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.

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In an effort to lower the exchange rate of the national currency, on March 29th the President of Brazil Dilma Rousseff announced a decree instating a tax rate increase on international borrowing by Brazilian banks and companies. Active immediately, the decree mandated that overseas loans issued by corporate bodies in Brazil be subjected to a 6 percent tax. The current rate, introduced for the same goal in November 2010, is 5.38 percent. As part of the updated protection measures, the new level will apply to loans issued for periods of less than one year, compared to the current timeframe of only 90 days. Commenting on the changes, Nathan Blanche, partner at Tendencias Consultoria Integrada in Sao Paulo, said, “..it’s a prudential measure that will inhibit operations in the short and medium term, not in the long term.”

The decree is the latest step in the “currency war” faced by the government of Brazil, during which Brazil’s real rose by 39 percent against the US dollar since the end of 2008. As a result of the inflated exchange rate, the government of Brazil is receiving significantly lowered tax revenues and the national interest is higher than in neighboring countries.

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In its latest federal tax report, released August 17th, the Brazilian Ministry of Finance announced that total tax collections in July reached BRL 67.97 billion (approx. USD 38.75 billion). The figure represents a 10.8 percent increase over July 2009, and 10.5 percent rise in comparison to June 2010. The total tax revenues for the 2010 calendar-year have reached BRL 447.46 billion (approx. USD 255.11 billion), a 12 percent improvement over the same period in 2009.

The July collections figure even exceeded market expectations, with many economists having projected a marginally lower result of BRL 67 billion (approx. USD 38.19 billion). In the face of the better than estimated results the Brazilian Planning Ministry has increased the 2010 total cumulative tax forecast to BRL 636.96 billion (approx. USD 363.15 billion).

The overall positive results for the first seven months of 2010 were caused by notable improvements in collections in almost all tax categories. Most impressively, fuel tax revenues grew 139 percent throughout 2010, with a cumulative tax total of BRL 4.35 billion (approx. USD 2.48 billion). Additionally, collections from the industrial product tax rose 26 percent, to a level of BRL 15.25 billion (approx. USD 8.69 billion). National import tax, and welfare taxes increased 19 percent and 17 percent respectively. The financial operations tax (IOF) also brought in 33 percent more revenue compared to the same period in 2009, rising in 2010 to a total of BRL 14.44 billion (approx. USD 8.23 billion). Guido Mantega, Finance Minister of Brazil, recently commended the IOF for also bringing significant secondary economic benefits by greatly reducing volatility in prices of the Brazillian Reais.

Despite the overall positive results for the first seven months of 2010, a marginal drop was reported in revenues from corporate income tax. Total corporate tax collections for the period were BRL 80.62 billion (approx. USD 45.96 billion), a drop of 0.79 percent compared to the timeframe in 2009.

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The Financial Action Task Force (FATF), an inter-government body created to develop international anti-money laundering policies, has evaluated and approved the Brazilian Government’s implementation of the National Strategy Against Corruption and Money Laundering (ENCCLA). According to FATF’s report, released August 9th, the Government has developed coherent and sound strategy for anti-money laundering (AML) and combating the financing of terrorism (CFT).

With the implementation of the ENCCLA the Government is deemed to have greatly enhanced its ability to carry out appropriate prosecutions on money laundering offenses, by creating a system of Specialised Federal Courts (SFC). The advent brings together the nation’s most prominent federal prosecutors and judges specialized and experienced in money laundering and financial crime investigation. In its lifetime, the SFC has initiated 4 760 investigations, started 780 indictments, leading to an approximate BRL 1.8 billion (approx. USD 1 billion) in seizures.

Brazil is also deemed to be making adequate progress in combating terrorist financing. Surveillance of potential high-risk activities has been thoroughly stepped up, through advents like regional intelligence structures and global inter-Government cooperation. However, at this stage, the results are considered to be marginally behind international standards.

Despite the overall commendations, the FATF has issued several further recommendations to the Government for future legislative enhancements. Currently, terrorist financing is not a stand-alone punishable offense, and while the Government’s provisional legal measures are deemed adequate, further legal progress would aid Brazil’s ability to extradite international offenders. Support should continue to be provided to the SFC system, which is deemed to be a keystone of the AML and CFT efforts. The Government is also advised to extend its legal framework regarding asset freezes and confiscations in instances of financial crimes. Further, despite no money laundering cases being recorded in the national closed pension funds sector, Brazil should extend reporting requirements for all categories of designated non-financial businesses and professions.

Photo by Conrado Tramontini (Conras)

Signaling an economic recovery for the country, the Brazilian Government has announced that it has experienced the second highest budget surplus ever recorded in the month of January for the country. The surplus, which included revenues from the federal government, local governments and state enterprises, had increased to BRL16.19 billion (approx. USD 8.8 billion), compared to BRL7.36 billion (approx. USD 4.05 billion) indicated in January 2009, and compare to BRL276 million (approx. USD152 million) in December 2009. The result has exceed most economic projections, which had estimated a surplus of no more than BRL14 billion (approx. USD7.69 billion).

The raised national budget figure has been attributed to vast improvements in the country’s economic performance, and subsequent tax collections, along with the expiry of several industry-specific tax breaks. Further, the high surplus figure could be explained by the Brazilian Government’s customary propensity to reserve a significant portion of its spending for the latter half of the year.

The Brazilian Government has claimed that it will keep the budget surplus at 3.3 percent of the nation’s GDP for remaining months of 2010. In light of the latest figures Altamir Lopes, Brazilian Central Bank Economics Department Coordinator, said, “…our expectation is full compliance with the savings target this year without need for use of available deductions.”

Photo by Rafael Lopes – Dillbert