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Economic Watch
Latam
• Financial taxes have performed reasonably well as a cheap method of
gathering resources in Latam, but side effects raise questions regarding
their toll on the overall economy
The increase in the cost of involving in a formal transaction gives incentives to informality and
disintermediation, which can be seen in the increasing levels of cash preference and interest
rate spreads. It also raises the cost structure of firms working within the formal sector. These
consequences can be extrapolated and used as a guideline for policy makers interested in
analyzing the effects of financial transaction taxes in general.
• Those considering adopting a financial tax should clarify its main purpose,
whether it is recollection or regulation
If it’s the latter, there might be better alternatives that don’t imply a financial burden on the
agents of the economy.
Chart 1
Financial transaction taxes revenue as % of GDP
2.0
1.6
1.2
0.8
0.4
ARG
BRA
CHI
COL
PER
2010
2009
2008
2007
2006
2005
2004
2003
0.0
2002
Miguel Poblete
[email protected]
An overview of the experience with
banking transaction taxes in Latin America
2001
Economic Analysis
2000
Madrid, October 29, 2012
VEN
Source: BBVA Research, MECON (Argentina), Receita Federal (Brazil), SII (Chile), DIAN (Colombia), Sunat (Peru), Seniat (Venezuela)
Taxes considered: Argentina: Impuesto sobre los créditos y débitos bancarios
Brazil: Contribuição Provisória sobre Movimentação ou Transmissão de Valores e de Créditos e Direitos de Natureza
Financeira (CPMF)
Chile: Impuesto a los actos jurídicos
Colombia: Gravamen a los Movimientos Financieros (4x1000)
Peru: Impuesto a las Transacciones Financieras (ITF)
Venezuela: Impuesto al débito bancario (IDB)
The author would like to thank the helpful comments from the Emerging Economies and Regulation and Public Policies Units that
supported the development of this report.
Economic Watch
Madrid, October 29, 2012
An overview of the experience with banking transaction taxes in
Latin America
In the aftermath of the last financial crisis, a number of propositions have arisen as potential
measures to regulate financial markets. An alternative presented by the European Commission
is the introduction of a financial transaction tax. This tax would affect transactions of financial
instruments in where at least one of the participants is located in the European Union. As some
EU countries are pushing for such measures to be approved soon, it makes sense to analyze
the experiences of regions that have already implemented taxes on financial transactions (FT) to
consider its pros and cons.
There are three main types of financial transaction taxes that have been applied throughout the
world: i) taxes on bank transactions, that is, taxes that apply to movements on debit and/or credit
accounts, ii) taxes on currency transactions, like the Tobin tax, which applies to spot conversions
of currencies, and iii)taxes on the trading of securities. The first category is also classified as a
banking tax while the other are also referred to as non-banking taxes. Even though all these taxes
have different scopes and intents, their effects on the markets bear some interesting analogies.
Latin America has a long history with financial transaction taxes, more particularly with banking
taxes. Here we are going to look at the cases of Argentina, Brazil, Colombia, Peru and Venezuela,
who have or have had taxes on almost all transactions done through the banking system, Chile,
who taxes some credit transactions, and Mexico, with a tax on cash deposits. It is important to
remark that all these are banking transaction taxes, which makes them inherently different from
the EU proposal, where a non-banking tax is being analyzed, but some of the lessons learned in
Latin America could serve as a guideline for European policy makers.
The predominant reason for applying a tax on financial transactions in Latam countries has been
to increase government revenue, especially in periods where fiscal deficits reached worrisome
levels (e.g. Argentina in 2001-2002, Venezuela 2002-2005). In Chart 1 we can see that this
policy had the desired impact, generating non-insignificant revenue levels even in years of
economic turmoil.
These taxes have the additional benefits of low collection costs (not only for the government,
but also to financial institutions who, in most cases, act as withholding agents), and being rapidly
available, having thus a quick and consistent effect on fiscal funds.
A second, important reason is to prevent tax evasion. In countries with high informality, a tax on
financial transactions serves as a way to monitor whether the declared revenues and expenditures
are consistent with the actual amounts involved in the trades. Also, depending on the nature of
the FT, it helps to prevent related illegal activities such as money laundering.
On the other hand, several negative effects have arisen. The most important is that it has
increased the levels of cash usage, informality and disintermediation. This has been a problem
especially considering that some of these countries already had low levels of formality and bank
penetration. The reason is straightforward: it increases the cost of involving in formal financial
transactions.
A clear way to notice these effects is by looking at the differences in cash preference between
periods where the tax has been active or inactive. For that purpose, check Charts 2 and 3 below.
REFER TO IMPORTANT DISCLOSURES ON PAGE 5 OF THIS REPORT
Page 2
Economic Watch
Madrid, October 29, 2012
Chart 2
Chart 3
Argentina:
Liquidity preference (cash/total liquidity)*
Venezuela:
Liquidity preference (cash/total liquidity)*
20%
35%
30%
15%
25%
20%
10%
15%
10%
5%
5%
* Shaded areas represent periods where the FT was active
Source: BCA, Indec and BBVA Research
Jul-10
Jan-12
Jul-07
Jan-09
Jan-06
Jul-04
Jul-01
Jan-03
Jul-98
Jan-00
Jul-95
Jan-97
0%
Jan-94
Jan-88
Sep-89
May-91
Jan-93
Sep-94
May-96
Jan-98
Sep-99
May-01
Jan-03
Sep-04
May-06
Jan-08
Sep-09
May-11
0%
Source: BCV and BBVA Research
In the same vein, some countries have seen increases in interest rate spreads (loans vs. deposits)
as a way to cover the greater costs implied.
A tax on transactions increases the cost structure of firms working within the formal sector. This
has a cascade effect, especially in cases where the tax applies to the majority of the operations
executed in the financial sector. As a consequence, it also has a detrimental effect on outsourcing.
Finally, the handling of the collected funds has raised a number of doubts. Even though in some
cases the taxes were designed to gather resources to tackle particular problems, there is always
the incentive to reallocate these extra resources to other areas. This happened in Brazil, where
even though the revenues were (by law) meant to be spent only in health, social security and
poverty programs, approximately 18% of the funds were used for other purposes.
The case of Mexico deserves special attention. Since the tax is on cash deposits it has the opposite
effect on liquidity (payment by cash becomes more costly), but the effects on formality are not
straightforward as, on the one hand it encourages the use of alternative means of payment, but
it also prevents firms and people from using financial institutions.
REFER TO IMPORTANT DISCLOSURES ON PAGE 5 OF THIS REPORT
Page 3
Economic Watch
Madrid, October 29, 2012
Table 1
Obtaining credit or funding using a bank account by willingness and reasons
% of total by stratum of employed personnel
Stratum of employed
personnel
Total
0 to 10 employees
Access to credit or funding
Use of a bank account
D. Those
that did not
C. Those
obtain funding
that did not
because lack
A. Those who B. Those that obtain funding
of interest
obtained bank obtained nonbecause of
or distrust in
credit
bank funding other reasons
banks
G. Those
G. Those
without a
without a
E. Those who bank account bank account
use a bank because of lack because of
account
of interest
other reasons
4.9%
23.0%
22.2%
49.9%
19.4%
48.6%
32.0%
4.1%
23.0%
23.0%
49.8%
16.7%
50.1%
33.1%
11 to 50 employees
18.7%
23.1%
5.8%
52.4%
75.7%
16.7%
7.6%
51 to 250 employees
30.7%
22.5%
2.0%
44.8%
90.9%
6.0%
3.1%
251 and more
employees
29.1%
24.7%
0.0%
46.2%
95.3%
3.1%
1.5%
Voluntary Rationing
Involuntary Rationing
Source: Castellanos, S. G., Morales, F. J. y M. A. Torán, “Analysis of the Use of Financial Services by Companies in Mexico: What does the 2009 Economic Census tell
us?”, BBVA Research Working Paper Number 12/16, July 2012
Also, it is worth noting that the Mexican tax (as well as in other Latam countries) is credited
against the general Income tax, so taxpayers can ask for a refund if retentions exceed obligations.
However, that doesn’t make it neutral, as it affects the taxpayer’s cash flow and disposable income.
With all this in mind, we are left to wonder how effective financial transaction taxes are. They
seem to have performed reasonably well as a cheap method of gathering resources, but the
side effects, especially on formality and cost structures, raise questions regarding their toll on the
overall economy. That leads us to think that the appropriate question for anyone intending to
impose a FT is to clarify its main purpose, whether it is recollection or regulation, because if it’s
the latter, there might be better alternatives that don’t imply a financial burden on the agents of
the economy.
REFER TO IMPORTANT DISCLOSURES ON PAGE 5 OF THIS REPORT
Page 4
Economic Watch
Madrid, October 29, 2012
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