BRASILIA/SAO PAULO Aug 6 Desperate to fix a fiscal crunch threatening its investment grade credit rating, Brazil is aiming to lure back some of an estimated $150 billion in unreported assets held abroad in tax havens and secret bank accounts.
The cash-strapped government is looking to raise 10 billion reais ($3 billion) this year by offering an amnesty from prosecution to Brazilians who have unreported assets outside the country.
The bill, expected to go to a Senate vote this month, would allow beneficiaries to come clean on two conditions – that they disclose the origins of the funds and pay a 35 percent penalty.
That might, however, be too ambitious and it could backfire.
“It’s going to be a major flop. A lot of Brazilians would like to clean up the ledger, but 35 percent is too high, the government is crazy,” said a retired top executive of a foreign bank in Brazil who asked not to be named.
Then there’s the tough sell of bringing funds back into Latin America’s largest economy just as it faces its worst recession in 25 years, wealth managers say.
“In theory, the move would have been welcomed but the timing isn’t good,” said Deiwes Rubira, who manages 1 billion reais in client assets at multi-family office Verus Gestão de Patrimonio. “There’s so much political and market noise at the moment that it could frustrate a healthy initiative like this.”
Brazil is reeling from high inflation and its currency has sunk to a 12-year low against the dollar. On top of that, uncertainty set off by a huge corruption scandal involving contracts with state-run companies is likely to put off the economic recovery for at least two years, bankers said.
Still, some wealthy Brazilians are considering the amnesty because they fear they will be caught for tax evasion in a worldwide environment of stricter scrutiny of offshore assets.
“I have a dozen clients who would immediately transfer their assets back to Brazil, pay the amount due and have their lives in order,” said Davi Tangerino, a white-collar crime lawyer with Trench, Rossi & Watanabe Advogados.
If it does succeed, the plan could offer some limited upside for the wealth management arms of banking giants like Itaú Unibanco Holding SA as well as Banco Bradesco SA , which sharpened its focus on the affluent with its $5.2 billion purchase of HSBC Holdings Plc’s Brazilian arm.
Grupo BTG Pactual SA, Brazil’s largest independent money manager for the rich, could also benefit, although the inflows would be a fraction of the industry’s 2.7 trillion reais worth of assets under management.
An Italian tax amnesty a little over 5 years ago lured over 80 billion euros ($87.38 billion) back into the country, providing a boost to wealth managers there. It was helped by relatively forgiving terms under which people were able to wipe the slate clean by paying a one-off tax of 5 percent of assets.
Chile is taxing repatriation of unreported assets at 8 percent this year, and Spain in 2012 offered a reduced rate of 10 percent on up to five years of previously undeclared earnings for individuals who made their hidden income official.
A similar attempt in Argentina since 2013 has not made much headway. The government allows Argentines to repatriate cash if they exchange their dollars for low-yielding government-issued energy bonds or certificates of deposit to buy real estate.
But there is widespread distrust of the government and the plan has drawn only a fraction of the estimated $225 billion in assets that Argentines hold off-shore.
Wealth managers in Brazil fear that the new plan here, proposed by leftist Senator Randolfe Rodrigues, may suffer a similar fate, although it is becoming increasingly difficult to hide assets.
In 2010, prosecutors charged more than a dozen UBS AG, Credit Suisse Group AG and Merrill Lynch & Co bankers for helping rich clients secretly move undeclared money abroad to evade income taxes.
Growing international cooperation is also closing in on tax evaders. Brazil’s Congress last month ratified an agreement to exchange tax information with the United States.
The recent discovery that more than 6,000 Brazilians had secret accounts at HSBC’s Swiss private banking unit caused shock waves in Brazil.
Over the past few years, bankers at the country’s largest money managers for the rich, like UBS and Pictet Group, sought to encourage Brazilians keeping money offshore to declare it to tax authorities, two bankers with knowledge of the situation said.
“Life has become very difficult when it comes to shifting money around,” the retired bank executive said. “A lot of people feel the noose tightening. Many are leaving Brazil, to fix their domicile in Uruguay or Portugal, which has friendly tax laws.”