Identifier
Created
Classification
Origin
07CARACAS2130
2007-11-05 17:31:00
CONFIDENTIAL
Embassy Caracas
Cable title:  

NEW TAX ON FINANCIAL TRANSACTIONS IMPLEMENTED WITH

Tags:  ECON EFIN VE 
pdf how-to read a cable
VZCZCXYZ0011
PP RUEHWEB

DE RUEHCV #2130/01 3091731
ZNY CCCCC ZZH
P 051731Z NOV 07
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC PRIORITY 0041
INFO RUEHBO/AMEMBASSY BOGOTA 7569
RUEHLP/AMEMBASSY LA PAZ NOV LIMA 0883
RUEHQT/AMEMBASSY QUITO 2697
RHEBAAA/DEPT OF ENERGY
RHEHNSC/NSC WASHDC
RUMIAAA/HQ USSOUTHCOM MIAMI FL
RUCPDOC/DEPT OF COMMERCE
RUEATRS/DEPT OF TREASURY
C O N F I D E N T I A L CARACAS 002130 

SIPDIS

SIPDIS

HQ SOUTHCOM ALSO FOR POLAD
TREASURY FOR MMALLOY
NSC FOR JCARDENAS AND JSHRIER
COMMERCE FOR 4431/MAC/WH/MCAMERON
ENERGY FOR ALOCKWOOD AND CDAY

E.O. 12958: DECL: 11/01/2017
TAGS: ECON EFIN VE
SUBJECT: NEW TAX ON FINANCIAL TRANSACTIONS IMPLEMENTED WITH
LAST MINUTE CHANGES AND UNCERTAINTY


Classified By: Acting Economic Counselor Shawn Flatt for reasons 1.4 (b
) and (d).

C O N F I D E N T I A L CARACAS 002130

SIPDIS

SIPDIS

HQ SOUTHCOM ALSO FOR POLAD
TREASURY FOR MMALLOY
NSC FOR JCARDENAS AND JSHRIER
COMMERCE FOR 4431/MAC/WH/MCAMERON
ENERGY FOR ALOCKWOOD AND CDAY

E.O. 12958: DECL: 11/01/2017
TAGS: ECON EFIN VE
SUBJECT: NEW TAX ON FINANCIAL TRANSACTIONS IMPLEMENTED WITH
LAST MINUTE CHANGES AND UNCERTAINTY


Classified By: Acting Economic Counselor Shawn Flatt for reasons 1.4 (b
) and (d).


1. Summary: (C) On November 1 the BRV imposed a 1.5 percent
tax on institutional financial transactions through December
31, 2008. The BRV's unveiling of this tax was particularly
clumsy, as the government had to modify its original decree
to prevent the collapse of key financial transactions
including credit card transactions, overnight interbank
loans, and commercial loans. The purpose of the tax appears
to be two-fold: to recover revenue lost through a recent
reduction in the value added tax and to target banking sector
profits. While BRV officials insist the tax will not be
inflationary, economic analysts expect that companies will
simply pass the tax on to consumers through higher prices.
Financial sector contacts are still uncertain of the exact
implications of the tax for various transactions, including
for the swap transactions that underpin the parallel market
for dollars. End summary.

--------------
BRV Bumblings
--------------


2. (U) The BRV imposed on November 1 a 1.5 percent tax on
the financial transactions of "legal entities and economic
entities without legal standing." This tax, known by its
Spanish acronym of ITF, was promulgated in a decree issued on
October 3 and subsequently modified October 26. The ITF is
similar to a tax on banking debits that existed from December
2004 to February 2006, except that the previous tax was lower
(0.5 percent) but broader, applying also to the financial
transactions of individuals. Under the ITF, a payment from
one company to another would be taxed at 1.5 percent, but
withdrawals from personal accounts will not be taxed.


3. (C) The BRV made several missteps in rolling out the ITF.
First, although the decree stated that the tax would be in
force from November 1, 2007 through December 31, 2008, Jose
Vielma Mora, the head of SENIAT, Venezuela's tax and customs
authority, indicated shortly after October 3 that the

December 2008 date was an error and that the ITF would only
be in force through December 31, 2007. According Pedro Coa
(strictly protect throughout),chief economist at Banesco, no
one in the financial sector believed Mora, figuring that his
statement was intended solely to reduce pressure on the BRV
over the tax. Indeed the October 26 modifications did not
include a change to the dates.


4. (C) Second, the BRV was forced to make several changes to
the decree based on the possibility that the ITF would shut
down the market for interbank overnight loans, commercial
loans, and credit card purchases. The October 26
modifications included exemptions for these markets: for
example, while a company must pay the 1.5 percent when it
makes interest payments, the bank does not have to pay 1.5
percent of the full loan amount upon making the loan. Pedro
Almoguera (strictly protect throughout),Technical Executive
Director of the Banking Association of Venezuela, said that
banking sector representatives had mounted a full-scale
lobbying effort to convince the BRV that the October 3 decree
would devastate the economy. He estimated to EmbOffs that
the changes made October 26 would reduce the amount the ITF
would cost banks from 10 trillion bolivars (USD 4.6 billion
at the official exchange rate) to 400 billion bolivars (USD
186 million).

--------------
Why, and Why Now?
--------------


5. (SBU) Deciphering BRV motives behind a given economic
policy is never easy, but local analysts seem to focus on one
of two complementary explanations for the ITF. First and
most proximately, analysts argue, the BRV imposed the ITF to
compensate for the tax revenues it lost by reducing the value
added tax (VAT) from 14 to 9 percent earlier this year. To

some of these analysts, the reduction in the VAT and
subsequent implementation of the ITF highlight the BRV's
"fiscal inconsistency" or poor planning.


6. (C) Several contacts in the banking sector, however,
believe that the ITF was designed expressly to target banks'
profits. Luis Zambrano (strictly protect throughout),chief
economist of Banco Mercantil, argued that the BRV had its
eyes on the profits banks were making from holding government
debt. Realizing it could not tax transactions on its own
debt (which, indeed, are excluded under the ITF),the BRV,
according to Zambrano, devised the ITF to cut into banks'
margins on other businesses. Almoguera said that individuals
in SENIAT, which Almoguera described as "professional," had
indicated to him that the tax was championed by BRV figures
outside of SENIAT who wanted to cut into banks' influence and
profits.


7. (C) These two explanations are not mutually exclusive.
In its published explanation of the motives of the decree,
the BRV cited the need for a "more progressive and equitable
tax system in accordance with the concept of a socialist
state." Contrasting the ITF explicitly with the previous
banking debit tax, the BRV justification emphasized that
workers, pensioners, and beneficiaries of social missions
would not be subject to the tax. This justification is
consistent with a goal of trying to shift the tax burden from
the public (which pays the VAT) to "legal entities" and
particularly banks, who must pay the ITF. As both Zambrano
and Miguel Octavio (strictly protect throughout),Executive
Director of BBO, a financial services company, noted, the ITF
also gives the BRV another tool in its arsenal to move
against banks (in this case) if it so desires.

-------------- --------------
Impacts: Inflation, Distortions, and Further Uncertainty
-------------- --------------


8. (SBU) BRV officials have argued that the ITF will not be
inflationary as consumers do not have to pay it. To a
person, however, all of the economic analysts we have talked
to believe that companies will pass the costs on to consumers
through higher prices. The ITF began to impact financial
transactions in late October, according to many of our
contacts, as companies rushed to make payments before it went
into effect and hesitated to make deals that might end up
being subject to the tax.


9. (C) The parallel market for dollars was one of the
markets most affected. According to Octavio and Klaus Nusser
(strictly protect throughout),Executive Director of Velox
Trading, the market virtually dried up as November 1
approached, with market participants unsure how to evaluate
the impact of the ITF on the bond swap transactions that form
the basis of the parallel market. Octavio said BBO was only
conducting parallel market transactions with those companies
and intermediaries who could be trusted to close the
transactions before November 1. Nusser said that there was
considerable uncertainty about how the ITF would be applied
to the swap transactions. He anticipated having to pay 1.5
percent when Velox deposited bolivars in the accounts of
clients who sold dollars. He said that banks might initially
withhold 1.5 percent when Velox bought the
bolivar-denominated government bonds necessary for a given
swap transaction, even though transactions on government debt
were technically exempt from the ITF. Finally, Nusser noted
that the banks acting as intermediaries for the purchase of
dollar-denominated government debt (used to swap with the
bolivar-denominated debt) might also have to collect 1.5
percent, which in theory should later be refunded. These
uncertainties, Nusser concluded, were driving up the spread
between buying and selling prices, leading potential market
participants to hold off on their transactions until the
ITF's impact became clearer.
DUDDY