UPDATE 1-Brazil could reinstate levy on local bonds-report

* Brazil could reinstate income tax on bonds, Estado says

* Further measures to fight rally are being considered

* Tax was ended in 2006 to stoke foreign bond purchases
(Adds nature of tax, recent move in paragraphs 2-5)

SAO PAULO, Nov 6 (BestGrowthStock) – Brazil’s government could
reinstate a 15-percent income tax on government bond purchases
by foreign investors in a bid to stem U.S. dollar inflows
fueling a rally in the currency, O Estado de S. Paulo newspaper
reported on Saturday.

The levy, which taxes capital gains on local debt holdings
by nonresident investors, was suspended in 2006, as a way to
help diversify the sources of funding for the government, the
newspaper said, without attributing the information.

Brazilian officials will gauge any steps to stem the real’s
(BRBY: ) rally after the G20 summit next week, it said. The
government recently raised to 6 percent from 2 percent a tax on
local bond purchases made by foreign investors, chiefly to fend
off a surge in demand for the securities.

Calls made to the finance ministry’s media office in
Brasilia for comment were not immediately answered.

The government is seeking to arrest a 7 percent jump in the
currency since June to protect local manufacturers and jobs as
demand for cheaper imports soars in the fast-growing economy.

Foreign investment in bonds and stock is flocking into
Brazil at the fastest pace since at least 2007, lured by the
nation’s high returns that, adjusted for inflation, are the
highest among the world’s 20 biggest economies.

Pension funds, endowments and other institutional investors
are exiting bond markets in developed economies like the United
States, where interest rates are at record lows, in favor of
high-yielding investments in fast-growing emerging markets like
Brazil, Thailand, Indonesia.

This is alarming governments that speculative capital
inflows could fire up their currencies, hurting exports.

Among measures Brazil could take to contain excessive gains
in the real in the short term are using the nation’s sovereign
wealth fund to buy dollars in the domestic currency market and
increasing a tax on foreign purchases of stocks from the
current 2 percent, Estado said.

Another step that authorities could employ is the use of
reverse currency swap contracts, which could allow the
government to buy foreign exchange in the futures markets,
Estado said.

With that strategy, the government would ease the
perception of an ample supply of dollars in the long term and
push the value of the currency up in the domestic market.
(Reporting by Guillermo Parra-Bernal; Editing by Xavier
Briand)

UPDATE 1-Brazil could reinstate levy on local bonds-report