Brazil Said to Scrap Plan to Tax Local Infrastructure Bonds

  • Economic team aims to present new measure to Congress by June
  • Government to consider market demands when setting regulation

Brazil’s economic team, led by Finance Minister Nelson Barbosa, is scrapping plans to tax local bonds that fund infrastructure projects and is instead reviewing a proposal to levy other fixed-income instruments, a member of the group said.

The team is working on the new measure now after meeting with investors and issuers and will probably submit the proposal to Congress by the end of June, according to the official, who isn’t authorized to speak publicly about the plans and asked not to be identified. The revamped proposal should be more aligned with market expectations than a plan submitted in December by the previous team led by then-Finance Minister Joaquim Levy, the person said.

The debate about how to tax fixed-income instruments comes as Brazil’s government seeks new sources of funding amid a widening budget deficit, the worst economic downturn in more than a century and a corruption scandal that has crippled more than a dozen companies. As the economic picture worsened, Standard & Poor’s and Fitch Ratings cut Brazil to junk and companies faced a credit crunch domestically and abroad.

The infrastructure notes were created in 2011 as a way to improve funding sources for projects and are exempt from income taxes for retail investors. Local issuers have already sold more than 15 billion reais ($3.8 billion) of the instruments in the local market, data compiled by the capital markets association known as Anbima show.

The measure sent to Congress in December erased the tax exemption on the bonds, known as CRIs when sold by companies and LCIs when sold by banks. A levy increase on agriculture-backed notes -- known as CRAs and LCAs -- was also included in that plan.

That proposal faced strong resistance by investors and introduced different taxes for agriculture and real-estate notes, the person said. The main goal of changing the tax structure is to allow for the notes to have longer terms that are in line with the time it takes to complete projects and to simplify the instruments, according to the person.