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iShares MSCI Brazil Capped Message Board

  • golfball_wackerguy golfball_wackerguy Oct 20, 2009 3:54 PM Flag

    No tax on ADR's

    Hope this is correct!

    Regarding the newly imposed tax on foreign investments...

    "This measure has more of a potential of making overseas investors migrate to the ADRs in New York because they won't have to pay taxes there," said Luiz Roberto Monteiro, an investment analyst at the Souza Barros brokerage in Sao Paulo.



    http://www.reuters.com/article/usDollarR...

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    • Checking the holdings for this ETF, most appear not to be in the form of ADRs:

      http://us.ishares.com/product_info/fund/holdings/EWZ.htm

      Thus, to create or redeem shares (rather than exchange existing shares) of EWZ, it would seem as if the tax might be incurred. Am I reading this wrong?

    • So wait. The future profitability of the companies in EWZ remains unchanged. The number of equities through which a foreigner can participate tax-free in that profitiability has gown down (limited to ADRs/ETFs).

      And yet you say that those equities will SELL OFF?

      That makes no sense.

      The market can certainly do stupid things, I won't dispute that. But I'm not going to short on those hopes.

      Then again, for those that want to go short, I say balls up and do it. To be honest, I wouldn't mind an opportunity to increase my holdings.

    • true but underlying brazil stocks will be under pressure. less activity so speculators will go elsewhere. also div. low lately. stay away till it all sorts out.

    • Yep, the whole thing is distasteful to investors. Reminds everyone that this is still BRAZIL of all places. And now Colombia is talking about a tax. If this spreads, LATAM is going to see a lot less money.

    • the entire emerging markets runup has been a result of the hedge fund carry trade. now, you can cross brazil off the list. yes, the tax was in place last year, although it was 1.5%, not 2% and you might want to take a look at a chart of the real and bovespa since the tax was scrapped.

      the substantial majority of investors buying into brazil since can be categorized as "hot money". whether this etf has to directly pay the tax or not, this is only one small vehicle for investing in a very large market. net result - a sustained selloff in brazilian securities and tax or no tax, this etf will tumble due to downward price pressure on holdings.

      I didnt short today, but I look forward to building a put position once it bounces. I was waiting for it to hit 74 today and that didn't happen, so i'll wait.

    • From a fiscal perspective, the tax makes sense. It raises government revenues, stabilizes the real, and quells damage to Brazil's export trade, the fundamental driver of Brazil's economic growth.

      Does it discourage investment in Brazil? Technically yes, but history shows that the cost is small in comparison to the gain. Long-term capital investment in Brazil will not be significantly effected by the tax. What will be effected is the willingness of a hedge fund to conduct short-term currency transactions in order to speculate on the Bovespa. Each of those transactions will now incur a ding.

      The tax is not a new concept, nor should it comes as a surprise to anyone. If you remember, roughly the same tax was in place last year before the crisis, when Brazil was the "hot" ticket item.

      From our perspective, we gain because now foreigners that want to buy Brazilian stocks will have an incentive to buy ADRs/ETFs rather than stocks directly on the Bovespa. In an efficient market, our shares will sell at a premium with respect to NAV. So thank Lula (unless you shorted, in which case... well, you better cover while you can)

    • Pelosi suggested doing the same thing (on a much smaller scale) this spring... but the Congress wouldn't allow it. It was like 1/10th of a percent on every transaction. This was intended to stop day traders and market manipulation. It was 1/10 th of a percent on the entire transaction's value.....

    • And no tax on ETFs either.

      This actually makes EWZ an even better play on Brazil.

      • 2 Replies to oneaweek2008
      • I'm not sure your logic is correct. ETFs are not the same as closed-end funds. In a closed-end mutual fund, a fixed number of shares exist and represent ownership in a pool of the underlying securities. An ETF, however, allows for creation and redemption of shares in large units, i.e. in this case a market-maker can exchange a large enough block of EWZ shares for a weighted basket of the underlying stocks, and vice-versa.

        A closed-end fund could, in theory, be worth a premium since the number of shares is fixed, and trading in them might be able to escape the tax. This would be in contrast to, say, owning the equivalent number of shares in the underlying stocks, where presumably any attempt to transfer them on the exchange would incur the tax.

        What this implies, though, is that there could be some loss of liquidity, as the action of creating and redeeming shares of EWZ would seem to be impacted by this new tax, as that activity involves transferring the underlying shares, does it not?

        Now, to the extent that the underlying shares are ADRs, the above point may be moot. Indeed, as with the closed-end fund situation, any existing ADRs representing an ownership interest that can be transferred without incurring the tax could well trade at a premium due to the extra liquidity they offer.

        I'm no expert, so invest at your own risk. Me, I'm out as of today with a very nice profit.

      • Exactly...

        Yesterday, if a European or Asian investor wanted to purchase Brazilian equities, they could have converted to dollars and bought ADRs/ETFs on the NYSE, or they could have converted to reais and bought shares directly on the Bovespa.

        From today forward, if a European or Asian investor wants to purchase Brazilian equities, they have to convert to dollars and buy the ADRs/ETFs on the NYSE, lest they get slammed with a 2% tax.

        In a perfectly efficient market, the ADRs/ETFs on the NYSE will sell at a 2% premium in comparison to the Bovespa. So why the sell off?

        Answer: Because this market is filled with day-trading amateurs that don't know have a clue as to what they are doing.

        People are flocking out of the dollar and to the country where maximum future growth will occur, so much so that the Brazilian Fed is forced to put up a fence to preserve the viability of their export trade. The fence does not apply the shares that you own--the mob can continue to "bid" on those shares. So you go and sell them at a loss? Even worse, you borrow them from other people and sell short?

        Are you f--ing crazy?

 
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