There are no shortage of legal and tax-related impediments to domestic securitization in Brazil, but a newly enacted tax reform is likely to make domestic loan- and mortgage-backed securitizations that little bit easier.

The tax in question is Cofins, a federal tax applied to the gross revenues of all Brazilian financial entities. Until the reform, only financial institutions were allowed to deduct deposit expenses from the gross revenues that constitute the tax basis for Cofins a treatment that didn't apply to securitization vehicles. Consequently, if banks kept assets on their balance sheets they were allowed to deduct deposit expenses, but if they securitized those assets they would automatically lose that advantage.

This situation prompted Jorge Levy, an attorney with Levy & Salomao and vice president of the Brazilian Association of Banks, to pay a visit to the Federal Revenue Service. "We wanted securitization vehicles to enjoy the same tax deduction granted to financial institutions," said Levy. " To make our case, we assured the federal government that since banks were already given special treatment, the fact that they securitized some of their assets wouldn't affect the total amount of taxes collected."

As a result of these lobbying efforts, a provisional measure giving securitization vehicles the favorable treatment was enacted. "With this new treatment, it is interesting again for banks to securitize," explained Levy.

Though they are regarded as laws, provisional measures in Brazil are presidential decrees with a 30-day life, which in theory have to be ratified by Congress during that time. In practice, however, this process can take years, meaning that provisional measures have to be re-approved every 30 days by the executive until the measures are finally ratified.

"It is hard to say when the Cofins tax reform will become a law," said Levy. "But our background research shows that, due to the fiscal problems that plague the country, all tax reforms proposed by the executive receive congressional approval."

At this point, the restructuring of the Cofins will only apply to mortgage and loan securitizations. However, the Brazilian Association of Banks is asking the government to expand the reach of the reform to all types of securitizations.

While the change was welcomed by securitization pros, it is unlikely to be enough to cheer up everyone. "Brazil's local ABS market is at a standstill right now. It is as bad as it was a year ago and, unless substantial legal and tax-related changes are implemented, I don't think we'll see any improvements in the near future," said Vinicius de Queiroz, head of domestic ABS at Citibank. TH

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