Overview (November 2002)

Tax Rates
New Guidelines and Legislation

Tax Rates

Income tax law
Generally, tax rates under Venezuelan law are expressed in what are known as tributary units (TU), each of which has a current value of Bs14,800 (their value is adjusted annually in line with inflation). The application of tax rates to individuals, corporations, and mining, hydrocarbon and oil-related activities are set out in the tables below.

A taxable rate of 34% applies to profits obtained by individual non-residents in Venezuela.

New Guidelines and Legislation

Major modifications were recently made to the Value Added Tax Law and the Income Tax Law.

Value Added Tax Law
The most important amendments are as follows:

• The value added tax (VAT) rate has been increased from 14.5% to 16%.

• The definition of 'services' which are subject to VAT has been expanded to include leases or similar contracts on immovable assets for non-residential purposes.

• The requirements for qualifying as a taxpayer were abolished. Previously, a minimum amount of income had to be generated from taxable transactions in order for an individual to be considered a standard taxpayer for VAT purposes. Under the new law any individual or legal entity that carries out taxable transactions will be considered to be a taxpayer, regardless of the income received from such transactions.

• The international transportation service is considered to be partially applicable in Venezuela. Accordingly, a 16% VAT rate will apply to 50% of the value of freight and tickets.

• An additional 10% tax rate is levied on the import or sale of certain luxury goods.

• The tax administration is entitled to disregard the execution of agreements, the incorporation of legal entities, and the use of forms or procedures by the taxpayer which result in a reduction of the amount of VAT payable.

• The applicable regime for the recovery of VAT credits for the export sales of local goods and services was amended. A future regulation will determine the procedures and requirements to be followed by taxpayers for such recovery.

All amendments took effect on September 1 2002 except for Articles 43 and 44 concerning VAT credit recovery procedures, which took effect in October 2002.

Income Tax Law
The Income Tax Law was modified on December 28 2001 (Extraordinary Official Gazette 5,566) in terms of:

• taxation of dividends;

• inflation; and

• transfer pricing provisions.
  

The amendments concerning dividends and inflation may have international implications.

Taxation on dividends
The new tax on dividends applies to payments made by an entity to its shareholders. The new tax was introduced in order to prevent an entity from declaring and paying dividends to its shareholders on the basis of the income that appears on the company's balance sheet rather than the company's taxable income, which is usually lower.

Transfer pricing provisions
Although the Income Tax Law 2000 contained provisions regarding transfer pricing, additional provisions were included in the recent amendments in order to allow for their more accurate application.

In applying the transfer pricing provisions, the law defines a 'related party' as: <>"an entity that participates directly or indirectly in the direction, control or capital of another entity, or where the same parties participate directly or indirectly in the direction, control or capital of both entities."

In cases where the law does not apply, the guidelines on transfer pricing issued by the Organization for Economic Cooperation and Development (OECD) in 1995 are applicable.

The following methods apply in determining the correct price for transactions entered into between related parties:

• the comparable uncontrolled price method;

• the resale price method;

• the cost plus method;

• the profit split method; and

• the transactional net margin method.

These methods are identical to those contained in the OECD guidelines.

Perhaps the most important aspect of the most recent modifications is the introduction of rules that allow taxpayers to execute advance pricing agreements with the tax administration in order to determine the accepted value for transactions between related parties. These agreements are similar to US advance pricing agreements and allow the use of a methodology which differs from that contemplated in the law, provided that it is accepted internationally.

For further information on this topic please contact Maria Virginia Anzola at Rodriguez & Mendoza by telephone (+58 212 285 49 44) or by fax (+58 212 285 13 79) or by email ([email protected]).