UPDATE 3-Brazil to tax savings to pave way for rate cuts

Wed May 13, 2009 5:07pm EDT
By Isabel Versiani
BRASILIA, May 13 (Reuters) - Brazil unveiled plans on Wednesday to tax returns from savings deposits of more than 50,000 reais (about $24,000) from 2010, paving the way for lower interest rates while deterring a flight from government bonds that could threaten public finances.
With the central bank's benchmark Selic rate at an all-time low and likely to keep falling, the government is trying to prevent an exodus from higher-yielding domestic bonds to tax-free savings accounts, which could make it difficult for the government to finance the national debt.
"The measures aim to discourage large investors from migrating to a mechanism that is designed for individual depositors, to prevent it from being distorted," Mantega said at a news conference in Brasilia, the country's capital.
"We don't want to transform savings accounts into a mechanism of financial speculation," he added. "What we want is to create conditions so that the Selic rate keeps falling."
The measure will only take effect if the Selic remains below 10.5 percent. If it falls below its current level of 10.25 percent 2009, as expected, the government will reduce taxes on investments in domestic bonds for the rest of the year to discourage large investors from switching to savings accounts, Mantega said.
The government will only tax the amount above the 50,000 reais limit and the tax rate will rise proportionately to the fall in the Selic, Mantega said.
If the Selic rate falls below 7.25 percent, the tax rises would stop and returns on savings accounts would once again become more attractive than those on government bonds, he said. Markets are expecting a 9.25 percent Selic rate by the end of this year.
Interest rate futures <0#dij:> on the BM&F commodities and futures exchange in Sao Paulo fell on Wednesday. The January 2010 contract eased to 9.39 percent from 9.41 percent in the previous session and the January 2012 contract fell to 10.94 percent from 11.01 percent.