Tax exemption for foreigners would attract capital in debentures, analysts say

An exemption from payment of Income tax for foreign investors who buy debentures debt securities issued by companies, can help encourage a migration of capital to this type of investment, according to analysts.

The measure is one of the objectives of the federal government and can be approved as part of the work of the Legislature before the electoral period, including as an amendment to the so-called Marco das Garantias, already approved in the Chamber and under analysis in the Senate.

Currently, foreign investors have a very small share of the debenture market, says Carlos Antonio Rocca, coordinator of Fipe’s Center for Capital Market Studies (Cemec-Fipe).

Considering the portfolio investments foreigners, the debenture market represents just over 1%, around R$5 billion of the R$417 billion in foreign capital. The debenture market has around R$743 billion traded.

“More than half of the foreign portfolio is in stocks, followed by government bonds, around 20%, and the rest is in banking businesses. Debentures have an insignificant share”, explains Rocca.

change of scenery

Questioned by CNN Brasil Business on the proposal, the Monetary Securities Commission (CVM ) states that it “signals positively to movements like this”.

For the agency, initiatives like this “seek to generate more opportunity and speed for the national economy, which tends to expand the access of Brazilian companies to foreign capital via the capital market – a segment regulated by the CVM”.

Rocca sees the exemption proposal as positive, with the potential to increase the share of foreign capital allocated to the modality, which would also be beneficial for companies looking to raise capital.

However, he does not believe that this would lead to an increase in the total capital invested in Brazil by foreigners, but rather to a reallocation within the existing portfolio itself.

“It may have an effect of reallocating fixed income in the Brazilian market, the volume I already have doubts about, because portfolio managers usually allocate by region, country, taking into account several variables”, he explains.

In the case of the secondary market, in which investors trade the debentures they compare, the measure tends to bring more liquidity, which is positive for better pricing of assets, which can also attract domestic investors.

“Foreign investors in the stock market have more mobility and turnover than in the case of domestic investors, they act to increase liquidity, and this can happen in this area as well, which is positive”, he evaluates.

Rocca believes that the main reason for the low chance of an increase in the total volume invested would be a matter of fiscal risk that is still high in Brazil, with a still weak economic outlook, which interferes with the ability of companies to pay the bonds once the terms finish.

“What conditions investment decisions most is the general state of the economy, macroeconomic stability, growth. They contribute to whether or not to attract investors,” she says.

Even so, the tax issue is “certainly” taken into account by foreign investors, says Thiago Buschinelli Sorrentino, a researcher at the Center for Fiscal Studies at FGV Direito SP.

“All taxation is a cost for the operation, and impacts the choice due to the change in profitability. Investors prioritize investments with lower costs”, he points out.

He recalls that, today, the IR rates for debentures are high, with a minimum value of 15%, a considerable value for investors. In this sense, an exemption would tend to attract more foreign capital.

“You cannot forget that the tax burden is not the only or the main obstacle to contributions. It is important, relevant, but the biggest obstacle to foreign investment is the lack of transparency, bureaucracy, with legal uncertainty at this moment”, he says.

Sorrentino believes that “the person who invests, even in debentures, has to ask himself two things: if he will be able to get investment out of the country and price the operation, know what the company’s chance of paying interest is or if the rest of the world earns more. These factors may nullify the benefit of the exemption.”

Taxation of debentures

The FGV researcher explains that, currently, there are two ways of taxing debentures.

The first, called primary, is used when an investor takes a security issued by a company in which, after a period, there will be payment of the purchase price plus the interest established by the issuing company.

“Here, taxation follows a progressive table over time, with a minimum rate of 15%, and increases the sooner you try to redeem it”, he explains.

The second type, called secondary taxation, occurs when someone acquires the debenture but trades it later.

In this case, taxation is based on capital gain, where the tax is calculated by the difference of how much you paid for how much you sold, applying a tax rate.

“As a general rule, it is common to charge IR for foreign investors, mainly to prevent purely speculative capital, which can even cause a foreign exchange imbalance”, comments the researcher.

The exception, according to Sorrentino, is when the government understands that the investment would not be speculative, with a positive impact on production and strengthening the economy, and therefore may have a different tax treatment.

This is the case of investing in stocks and government bonds in the Treasure in which foreigners already have income tax exemption.

In this sense, Rocca believes that the exemption for debentures would bring equality between the three modalities, and would change a scenario in which public bonds are more attractive than private bonds due to the lack of taxation.

At the same time, Sorrentino believes that the exemption “creates a discrepancy between foreign and national investors, it is possible to assess through isonomy, tax justice that would be shaken, privileging people in the same position, since they are all investors”.

He points out, however, that “from the economic and development point of view, the justification is the desire to attract more foreign investment to the country. If it is understood that local investments are not enough to justify the maintenance of the system, and it would benefit from the inflow of foreign exchange, then it is justified. Without capital input, it does not justify having an exemption”.