IOF on Capital Flows to the Fixed-Income Market Removed

BRAZIL ECONOMICS - Report 05 Jun 2013 by Marcelo Gazzano, Cristina Pinotti and Affonso Pastore

The Finance Ministry announced the elimination of the IOF (Tax on Financial Operations) on investments from abroad in the fixed-income market. The IOF rate had been raised from 2% to 4% on October 4, 2010, and then to 6% on October 18, 2010, staying there until today.

The decision did not come as a surprise in light of the current forces for the real to depreciate. There are two important changes underway in the global economy. The first is the prospect of sustainable recovery of the American economy. Although this is accompanied by slower growth in Europe and emerging economies, the likely prognosis is for a gradual reduction of the Federal Reserve's asset purchases, causing a reduction in international liquidity. The second is the signals of moderate deceleration of the Chinese economy, increasing the probability of a modest decline in commodity prices. The consequent appreciation of the dollar, and the loss in Brazil's terms of trade coming from the commodity price trend are the forces acting to weaken the real.

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