By Fernando Cardoso, Bernardo Caram and Marcela Ayres
SAO PAULO (Reuters) -Brazil’s Finance Ministry on Friday said it had scrapped a higher transaction tax on funds invested abroad after critics inside and outside the government blasted the move as backsliding toward the return of capital controls.
The measure was part of an executive decree on Thursday raising Brazil’s IOF financial transactions tax for a range of operations in order to plug a budget gap. Immediate outcry led Finance Minister Fernando Haddad to partially reverse course.
"Due to the repercussions we had to be quick with the revision," Haddad told journalists in Sao Paulo.
"We understood that ... it was worth reviewing this item to avoid speculation about objectives that are not proper to the Finance Ministry or the government, such as inhibiting foreign investment, which had nothing to do with it," he said.
Brazil’s currency weakened over 1% against the U.S. dollar in Friday morning trading before paring losses, supported by global dollar weakness.
The higher tax rates, rolled out on Thursday with immediate effect, caught the central bank and parts of the government’s own economic team off guard, according to three officials who requested anonymity.
The central bank did not approve or support the move, which reversed Brazil’s recent efforts to streamline currency-related taxation as part of a push to join the Organisation for Economic Co-operation and Development, the sources said.
"It’s a setback for the internationalization of the Brazilian economy," said one of the officials.
Haddad, who said in January that the government would not modify the IOF tax on currency transactions, acknowledged on social media that Thursday’s measures were not coordinated with the central bank.
Former central bank director and economist Tony Volpon blasted the measures on X. "Imposing a 3.5% IOF on all investments made by Brazilians abroad ... amounts to capital controls," he wrote on Thursday.
On Friday, he said the reversal on financial flows was correct, but lamented that companies still had to pay a 3.95% IOF rate on loans, on top of interest rates in double digits.
High-income Brazilians will also pay more for transfers involving their pension funds. A range of foreign exchange operations such as international credit, debit and prepaid card transactions will pay a new IOF rate of 3.5%.
The Finance Ministry announced the higher rates as a way to boost public revenue by 20.5 billion reais ($3.61 billion) this year and 41 billion reais in 2026 to hit fiscal targets.
By returning to zero the IOF rate on transfers by Brazilian funds investing abroad, rather than raising it to 3.5% as planned, Haddad said the government would forego about 6 billion reais of additional revenue through 2026.
($1 = 5.7058 reais)