Yesterday it was announced the introduction of taxation in the savings accounts (caderneta de poupanca) in Brazil. The change will start in 2010 and it entails a taxation for investors with more than R$50,000. From that threshold and on, income tax will be applied but the tax base will increase gradually as long as the Selic rate is reduced. The main objective is to avoid distortions in the money market funds such these funds could migrate to the savings. Another goal is to create room for further reduction of the Selic rate without confront the institution framework of the financial system.
Regarding the fiscal impact the government said that the if the Selic rate reaches 9.25% and assuming it effectively triggers such migration of money, the income tax on investments funds should be reduced from the actual range of 22.5%-15.0% to a flat 15.0% rate. According to the government a 1% decrease in the Selic reduces the costs of public debt by around R$11 billion.
In brief, this is the right measure to avoid a migration of funds to the poupanca and also it will enable the government to continuing cutting rates without cause distortions in the money market funds industry.