Brazil considers lowering tax burden on fixed-rate debt -report

Tue Feb 19, 2013 9:32am EST

* Government studies changes in tax rates on bonds

* Seen as way to encourage investment for long run

* Finance ministry did not have an immediate comments

SAO PAULO, Feb 19 (Reuters) - The Brazilian government is considering lowering taxes on fixed-rate debt investments to discourage demand for local bonds whose yields are pegged to short-term interest rates, Valor Econômico reported, without saying how it obtained the information.

Under a draft proposal being analyzed at the finance ministry, fixed-rate instruments as well as funds investing in such type of debt with maturities longer than one year could pay a 15 percent income tax rate, down from the current 22 percent, the newspaper said.

A group of finance ministry economists is defending that the lower tax burden only applies to investment or funds with exposure to fixed-rate instruments with maturities longer than two years, the newspaper said. Investments pegged to the overnight Selic lending rate - the central bank's benchmark rate - could bear a heavier tax burden under the plan, the paper added.

A finance ministry spokeswoman in Brasilia did not have an immediate comment on the Valor report. An e-mail request for a comment on the Valor report did not get a response.

About 15 percent of the 2 trillion reais ($1.02 trillion) of investor money currently in investment funds is pegged to the Selic or another short-term interest rate gauge. According to one source within the government's economic team, the lower tax burden for fixed-rate debt "would entice longer-termed investments and detach them from short-term rates," Valor said.

The news comes as speculation mounts that the central bank is considering raising the Selic for the first time in more than 1 1/2 years to head off quickening inflation. Usually, when central bank policymakers raise the Selic, investors tend to migrate from fixed, toward floating-rate debt to benefit from the latter instruments' higher yields.