On 29 January 2020, the National Constituent Assembly (ANC) approved through Decree the partial reform of the Decree with Rank, Value and Force of Law of the Value-added Tax Law (Law).1 The Law will enter into force on 29 March 2020, and will apply from 1 April 2020. We believe Law is clearly unconstitutional, but we will assume the authorities will apply it, as the Supreme Court of Justice has authorized the application of other laws and decisions of the ANC.
The Law included important changes regarding the transactions subject to Value-added Tax (VAT) liability and the traditional form of determining the tax, through the creation of a surcharge (Surcharge) in cases of sale of goods and services agreed and/or paid in foreign currency, cryptocurrency or crypto-asset, different from those authorized by the Central Bank of Venezuela (Transactions in Foreign Currency). We believe that the means of payment authorized by the Central Bank of Venezuela referred to in the Law is the Venezuelan cryptocurrency named Petro.2 Essentially, the Law established a tax on the Transactions in Foreign Currency, regardless of whether they qualify as VAT taxable events. The National Executive must establish the Surcharge through a decree and may set it between 5% and 25%. The decree will enter into force 30 days after its publication on the Official Gazette.
The Surcharge will apply to territorial Transactions in Foreign Currency, making no distinction between the goods or services;or amount of the transaction. Any disposition or consumption of goods and services in foreign currency will be subject to the Surcharge. The Surcharge will not apply to the importation of goods and services; however, it will apply to transactions not previously subject to VAT liability, such as, the disposition of real estate or exempt or exonerated assets or services, not paid in Bolivars or Petros.
In practical terms, the Surcharge affects three types of Transactions in Foreign Currency: (i) disposition of tangible movable property and provision of services in general; (ii) disposition of goods and provision of services exempt or exonerated from VAT liability; and (iii) disposition of real estate property. In the first case, the Surcharge will be added to the general VAT rate (16% + Surcharge of 5% to 25%),3 and the accumulated tax could reach 41%, whilst in the last two cases it will apply isolated (from 5% to 25%) and not as a surcharge to the general VAT rate.
In Venezuela VAT has never been applied to the sale of real estate property, because since its creation in 1993 it only applies to movable tangible property (i.e., in the different stages of importation, production, commercialization and final consumption) and independent services. It is not clear whether the intention was to subject the disposition of real estate property to VAT liability or using foreign currency in real estate transactions. And taxing VAT not subject, exempt or exonerated transactions with the Surcharge based solely on the currency of the transaction constitutes a contradiction in applying the tax, because it affects transaction that are not taxable events of the tax and, therefore, are not even subject to the general rate. The Law did not modify Article 3, regarding the taxable events (i.e., it did not include the sales in foreign currency or the sale of real estate property as taxable.
1 The Law was published in Official Gazette No. 6.507 Ext. of 29 January 2020.
2 The Petro was created through the Presidential Decree No. 3.196, on Official Gazette N° 6346 Ext. of 8 December 2017 (V. Baker McKenzie's, The National Assembly declares the nullity of the Petrocurrency.
3 Presidential Decree No. 4.079 (Official Gazette No. 41.788, of 26 December 2019) ratified the general 16% VAT rate as of 1 January 2020.