Roberta Núñez Díaz, Raffalli De Lemos Halvorssen Ortega Ortíz Abogados, Venezuala

Introduction

According to the Venezuelan constitutional regime, the authority regarding the administration and system of mines and the preservation, development, and furtherance of natural wealth in the country is vested in the National Public Power. In the last 14 years, there have been important legal changes in Venezuela related to administrative, regulatory and tax matters (mostly related to national taxes and extra fiscal contributions1). One of the primary changes is the migration of concessions into the scheme of forming mixed companies and the exit of Venezuela from the International Centre for Settlement of Investment Disputes (ICSID) Convention. Despite this, there are still legal mechanisms to protect foreign investments in the mining sector.

Current legal framework

In the Special Official Gazette No. 6.058 dated November 26, 2011, the authorities related to mining were transferred to the Ministry of the People’s Power for Oil and Mining.  Such authorities include the regulation, laying down and monitoring of policies, as well as the planning, implementation and control over the activities of the National Executive Power in the area of mining.

On January 28, 2013, the Minister of the People’s Power for Oil and Mining and President of Petróleos de Venezuela, C.A. informed that Corporación Venezolana de Minería (CVM) would be created as an entity attached to Petróleos de Venezuela. 

On January 30, 2013, Decree No. 9.368 was issued and published in Official Gazette No. 40.109 on January 13, 2013, which ordered and regulated the transfer to Petróleos de Venezuela S.A., or an affiliate designated by it, of the authority to explore for and exploit either by itself or through an intermediary gold deposits, and to perform primary, related and ancillary activities for utilizing the ore, as well as to create the companies necessary to exercise those activities.

In addition, Petróleos de Venezuela, S.A. will have pursuant to Decree No. 9.368 the authority to explore and exploit all other minerals found in the territory of the Republic regardless of their origin or presentation, including the authority to exploit and explore as well as to process, store, hold, circulate, transport and commercialize, whether locally or abroad, the extracted minerals, except as provided in other laws. 

Decree No. 9.368 also states that Petróleos de Venezuela, S.A., or an affiliate that it designates, is authorized to conduct the required activities in accordance with the principle of sustainable development, environmental preservation and territorial organization, under the technical and financial terms that are most convenient for a rational exploitation of the deposit. In the event, due to the nature of the activities to be performed, it deems expedient that any other State entity or agency participates, it may assign part of the operator’s shares to that other State entity or agency, provided it is wholly-owned by the Republic.

The previously described activities may be conducted by it for a period of twenty (20) years starting from the publication date of the Decree in the Official Gazette, that is, as of February 13, 2013, with the possibility of requesting extensions contemplated in the law.

Later, by Decree No. 455 on October 1, 2013, published in Official Gazette No. 40.265 dated October 4, 2013, the President of the Republic reserved for the National Executive Power, through the Ministry of the People’s Power for Oil and Mining, the direct exercise of the exploration and exploitation of nickel and other associated minerals in certain areas, located in the States of Aragua and Miranda, the concessions of which had already expired.  CVM, a company wholly-owned by the Republic, was appointed to be in charge of conducting the activities necessary for the exploration and exploitation of nickel and other associated minerals.  The abovementioned decree became effective in law upon its publication in the Official Gazette, that is, as of October 4, 2013.   

Any companies intending to invest in the mining sector must take the applicable legal system into account before commencing operations in the country, so that they can weigh the tax impact of their proposed investments as well as the legal actions available to them in case disputes should arise with the Venezuelan State.  This is important for purposes of protecting their investments in the country, guaranteeing unrestricted transfer of their investment and profits to the country of origin of the investment within the framework of an exchange control system and managing applicable environmental legislation that may apply to them before and after commencing mining operations in the country.  

Bilateral Investment Treaties (BITs) entered into by Venezuela and the State of which those investors are nationals provide for investment protection mechanisms under International Law and, as such, they establish that disputes arising from the breach of guaranties set out in those treaties can be submitted  to arbitration. While Venezuela formally denounced the ICSID Convention on January 24, 2012, and as a result exited the Convention in a period of 6 months (on July 24, 2012), at least from July 26, 2012 until September 2012 the ICSID has accepted claims submitted by several companies from different sectors, even mining, including that of Rusoro Mining.  The cases being handled by the ICSID against Venezuela are associated with the expropriations and regulatory changes implemented by the National Government in recent years.

For instance, in accordance with the provisions of the Bilateral Investment Treaty between Canada and Venezuela, Rusoro Mining Ltd. submitted a statement of claim in an arbitration it filed against Venezuela before the ICSID.  In its claim, Rusoro Mining Ltd.asserted the breach by Venezuela of several guaranties of the Bilateral Investment Treaty, including the expropriation of its investments in Venezuela without adequate indemnity, not having been accorded fair and equitable treatment nor full protection and security for its investments in the country, nor the guaranty of unrestricted transfer of its investments and profits. Based on a valuation conducted on March 15, 2013 by independent experts, Rusoro Mining Ltd. requested an indemnity for the entirety of its losses resulting from violations by Venezuela under the Bilateral Investment Treaty, which, by April 2013, amounted to a total of US$3.03 billion. There is still pending for an arbitral decision. On January 30, 2014 the respondent filed a counter-memorial on jurisdiction and the merits.  

Another precedent is found in the arbitral decision dated January 16, 2013, issued on the occasion of a dispute submitted to arbitration proceedings commenced by

Vanessa Ventures Ltd., a Canadian company (claimant) against Venezuela (respondent), identified as ICSID Case No. ARB (AF)/04/6.  In this case, the claimed filed by the Canadian company was dismissed by the decision of the ICSID tribunal, which upheld the termination by Venezuela of the gold and copper mine concessions at Las Cristinas mining site (Ciudad Guayana, State of Bolivar), as it deemed that there had been a breach of contract on the part of Vanessa Ventures Ltd.  The ICSID Tribunal concluded that the events of expropriation had not taken place and that Venezuela had complied with the standards of fair and equitable treatment without violating the Bilateral Investment Treaty between Canada and Venezuela. 

It has been pointed out that investors are not without protection in spite of the exit of Venezuela from the ICSID.  The basic investment legal framework is still the one defined by the BITs signed by Venezuela with approximately 26 countries.  Those BITs provide for ways to resolve disputes between an investor and the National Government.  Some include ICSID as the sole option among arbitration centers to be resorted to, while in other cases treaties include an ad hoc tribunal regulated by the arbitration rules of the United Nations Commission on International Trade Law (UNCITRAL). 

There are opinions asserting that, legally speaking, the exit of Venezuela from the ICSID Convention does not mean that foreign investors protected by a BIT have lost the possibility to resort to ICSID, where such possibility was offered in the treaty.  If, in the text of the BIT, the State has given its unconditional consent to ICSID arbitration, the denunciation of the ICSID Convention cannot affect the legitimate right of the investor to resort to the form of dispute resolution offered by the State.  As such, to actually cease being susceptible to the filing of claims before the ICSID against it, Venezuela would have to indispensably renegotiate with the relevant States the arbitration clauses contained in the BITs, especially, if unconditional consent was given to ICSID arbitration. 

As far as the environmental legal framework is concerned, companies wishing to invest in the mining sector are required to comply with the laws and regulations in force to demonstrate to the Venezuelan State that they can extract resources with the least possible impact and contribute to sustainable development.  

At present, there are approximately 11 laws (some organic and other special), about 12 Regulations and 2 Resolutions that contain obligations for investors concerning environmental preservation.  It is worth mentioning that environment control by the State can be exercised in a retrospective or prospective manner. Retrospective control of mining operations is exercised by, among other things, authorizations, approvals, permits, licenses, concessions, allocations, contracts, managing plans, and registration.  Prospective control of mining operations is exercised through environmental guardianship, audit, supervision, and environmental police.  

Investors, before initiating their activities, must submit an Environmental Impact Study for programs and projects referring to the exploitation or processing of, among others, metal minerals and precious stones.  These studies are conducted pursuant to the environmental law. 

The exploitation of mineral wealth is subject to payment of taxes on exploration, exploitation, processing, storage, holding, circulation, transportation, or commercialization activities.  These taxes would mainly be:

(i)  Land Tax, for each hectare of granted area;

(ii) Exploitation Tax;

(iii) Value Added Tax for the sale of minerals and their importation, exportation and related services;

(iv) Customs Fees, on the importation, exportation and transit of foreign goods through the national territory;

(v) Tariff Rates;

(vi) Royalties and Special Advantages under the Organic Law that Reserves for the State the Activities of Exploration and Exploitation of Gold and Related or Ancillary Activities, and

(vi) Income Tax.

In this last case regarding Income Tax, it should be considered whether any International Convention for the Avoidance of Double Taxation that mitigates or eliminates double taxation applies.  Venezuela has entered into Double Taxation Treaties with approximately 30 countries: Austria, Barbados, Belarus, Belgium, Brazil, Canada, People’s Republic of China, Czech Republic, Denmark, France, Germany, Indonesia, Iran, Italy, South Korea, Kuwait, Malaysia, The Netherlands, Norway, Portugal, Qatar, Russia, Spain, Sweden, Switzerland, Trinidad & Tobago, United Kingdom of Great Britain and Northern Ireland, United States of America, Vietnam and Cuba. Over half of these States are members of the Organization for Economic Co-operation and Development (OECD).

Conclusion

In conclusion, the regime and administration of mines rests under the authority of the National Public Power.  The most important legislative changes that have occurred in the last 14 years is the migration of concessions towards the schem of forming mixed companies for the exploitation of gold and the allocation of authority to Petróleos de Venezuela, S.A. or the affiliate designated by it, to directly or through an entity of the State perform the activities of exploration and exploitation of mines and mineral deposits.

Companies wishing to invest in this sector are to take into account, among other equally relevant aspects, the tax impact of the activities they would propose to carry out in Venezuela, the measures to protect their investments in the country, the transfer of profits to the country of origin of the investment within the framework of an exchange control system, and the environmental legislation that may apply to them before and after commencing operations in the country.

Despite the exit of Venezuela from the ICSID, there is an interpretation according to which foreign investors protected by a BIT may still resort to the ICSID (including its additional facilities mechanism) if that approach was included in such BIT, because the State has given its unconditional consent to ICSID arbitration, guaranteeing in that manner the legitimate right of the investor to resort to the form of dispute resolution offered by the Venezuelan State itself.  According to this interpretation, an indispensable condition for Venezuela to cease being susceptible to claims before the ICSID, would be that Venezuela renegotiates with the relevant States the arbitration clauses contained in the BITs.

1 This article does not give detail of the extra fiscal contributions, which should be properly addressed.

Roberta Núñez Díaz is an attorney at law in the Tax Law and Tax Litigation Practice Group in the Caracas office of Raffalli De Lemos Halvorssen Ortega Ortíz Abogados. Mrs. Núñez can be contacted at rnunez@rdhoo.com