The Brazilian government has extended its financial transactions tax to foreign loans maturing in up to five years.

This follows on from the announcement at the end of February that all foreign loans under three years would be subject to the 6% tax. Previously the tax only applied to loans under two years in duration.

The move is intended to prevent the further appreciation of the Brazilian real against the US dollar, and comes after remarks made by the Brazilian president Dilma Rousseff that developed nations were being highly protectionist by implementing measures that depreciated their currencies.

Rousseff hopes the measures will stall the flow of hot money entering Brazil, causing the overvaluation of the real. The appreciating real also hurts Brazilian exporters making their exports very expensive and imports cheap.

The new legislation is expected to have a limited impact on the ability of the main Brazilian banks to maintain their foreign funding sources.

“Most of the recent overseas fund-raising operations have consisted of bond sales with maturities substantially longer than five years,” observes Antonio Timoner-Salva, senior Latin American banking analyst at IHS Global Insight.

He sees the Brazilian government’s decision fuelled in part by the recent liquidity injections by the European Central Bank.

“Major European banks operating in Brazil may see this new regulation aimed at preventing their idle funds at home from taking a short-term tour of Latin America to obtain yields higher than current market interest rates in Europe,” he comments.

The new regulations will however change the way trade finance is carried out in Brazil.

Further to the new tax legislation, at the beginning of March the Brazilian government announced changes to the conditions that qualify a transaction as an export prepayment.

Under the new terms an export pre-payment transaction will only qualify as such if the prepayment is carried out exclusively by the importer or offtaker and that the transaction cannot be more than 360 days between disbursement and the export of the goods.

Export prepayment facilities lent by foreign banks no longer qualify as an export prepayment transaction, but will be treated as a cross-border loan, from a regulatory standpoint.

Essentially this means export prepayment facilities are no longer recognised as a trade finance product. A source at a local Brazilian bank tells GTR that the market is looking for alternatives to the export prepayment structure, yet in the meantime there is likely to be increased demand for local currency deals and ACCs.

ACCs are short-term (one-year) loans extended by Brazilian banks to exporters. Upon maturity of the loan, shipping documents are presented, the exporter pays the interest and importer pays for the goods. These transactions are not subject to any tax.