A problem facing large domestic investment projects is the absence of clear limits on the taxation burden which municipalities can impose on the income of such projects. Usually taxation is assessed on the basis of the project's gross income, regardless of investment or operating costs.

Previously some municipalities imposed very high municipal taxes on investment projects, even where the Constitution (which was replaced in 1999) limited the imposition of tax to certain key economic areas. These areas included hydrocarbons, mining, electricity and telecomunications. Such industries are deemed to be reserved for government-authorized companies or investors.

Although the new Constitution maintains the old rules (with some linguistic changes that favour the creation of legislative limits on municipal taxation), an overhaul of the existing judicial system is inlcuded. The Constitution details the replacement of the Supreme Court of Justice by a totally restructured Supreme Tribunal.

A recent decision by the Supreme Tribunal concerning a prejudicial measure affecting the municipal taxation of a telecommunications venture clarifies that the tribunal favours adherence to the constitutional limitations. The ruling is viewed as an indication that the tribunal approves limitations to municipal taxes that may affect private or public investment in so-called 'reserved areas'.

The ruling is welcome. However, it falls short of an unequivocal endorsement of clear boundaries to the sometimes excessive reach of municipal taxes on large investment projects, which significantly reduces profitability.

For further information on this topic please contact Humberto Vivas at Hoet Peláez Castillo & Duque by telephone (+58 212 263 6644) or by fax (+58 212 263 7744) or by e-mail ([email protected]).

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