IPS-English VENEZUELA: New Windfall Profit Tax on Oil
 
Date: Thu, 10 Apr 2008 18:31:00 -0700

 
Humberto Márquez

CARACAS, Apr 10   (IPS)  - Venezuela is about to levy a new tax on
the income of oil companies profiting from the soaring prices of crude,
which have brought them petrodollars in amounts over and above provision
for investment, costs and a reasonable profit margin.

The tax on windfall profits ”is intended to appropriate for the state,
as the owner of a scarce natural resource, the extra income generated
precisely because of the scarcity of the resource,” said Energy Minister
Rafael Ramírez.

It costs just five dollars or less to produce a barrel of crude in Venezuela.

The benchmarks Brent North Sea crude and West Texas Intermediate
have been over 70 dollars a barrel since mid-2007, and over 100 dollars
a barrel for the past six weeks.

President Hugo Chávez instructed his ministers in March to prepare
”a recommendation for what we might call a tax on ‘ganancia súbita'
(instant profits),” and said his decision was inspired by reading
U.S. economist Joseph Stiglitz, winner of the 2001 Nobel Prize for
economics, who is critical of speculative markets.
  
The Energy Ministry submitted the draft law to parliament -- where
160 out of 167 lawmakers are government allies, because the opposition
boycotted the last legislative elections -- which immediately approved
it on the first reading, on Apr. 3. It is expected to pass the final
reading in the near future.

The new tax will work as follows: whenever the average monthly price
of Brent North Sea crude is above 70 dollars a barrel, 50 percent
of the additional revenue will go to the state, and the other 50 percent
to the company extracting and selling the oil. But when the reference
price climbs above 100 dollars a barrel, the state's share of the
windfall profits will go up to 60 percent. 

The tax will not be applied if the price is lower than 70 dollars,
and Brent crude remains the reference in spite of the fact that Venezuelan
crude is somewhat heavier and cheaper than the North Sea oil.

Ramírez said that according to his estimates, the new tax will contribute
more than an additional one billion dollars a year to the Venezuelan
state coffers, ”because we think that current prices will be maintained.”

The additional revenue would add two percent to the nearly 50 billion
dollars that the state coffers now receive from taxes, contributions
to special funds and dividends.

Oil in this country is extracted and sold by the state-run Petróleos
de Venezuela (PDVSA) and about thirty private firms with which it
has joint ventures.

PDVSA's partners pump nearly one million barrels per day -- one-third
of Venezuela's total output -- from old oilfields or projects that
upgrade the extra heavy crude from the southeastern Orinoco Belt. 

Like its partners, PDVSA must pay royalties (16.7 percent), income
tax (between 34 and 50 percent of net income) and other smaller taxes.

In spite of the heavy taxation and the obligation to contribute to
social programmes and development funds, which absorbed 14 billion
dollars in 2007, PDVSA still made a net profit of 5.37 billion dollars
last year.  

The minority partners in the joint ventures, in turn, made a total
net profit of 902 million dollars.

The new tax will allow the government legally to appropriate a larger
share of profits from both PDVSA and its partners.

But Víctor Poleo, a professor of graduate studies in oil economics
at the Central University of Venezuela, says the new tax ”is politically
misconceived.” ”Taxes and royalties mean that the country renounces
its political and economic rights,” he told IPS. 

In his view, ”the only politically sovereign relationship between
the state and the operating companies is a service relationship: the
operator should operate, properly and at minimum cost, and be paid
costs and a profit, and the difference should belong and accrue to
the resource owner, which is the state.”

At bottom, say Poleo and other academics critical of Venezuela's
oil policies, the business plans and taxes in the industry under the
Chávez administration ”make concubines out of former servants” by
accepting companies which used to be service providers as partners
in co-ownership, albeit with minority shares. 

A precedent for the new tax is the Crude Oil Windfall Profit Tax
Act in the United States, signed into law in 1980 by then president
Jimmy Carter (1977-1981), which levied a tax of up to 70 percent on
the difference between the market price of oil and a lower price set
by law.  

Although the tax contributed some 80 billion dollars to the state
coffers until it was revoked in 1987 by president Ronald Reagan (1981-1989),
some economists claim it drained resources that could have been reinvested
in the industry to boost production.

In Venezuela the amounts collected by the new tax will be deductible
from the operating companies' income tax bills. ”According to our
calculations, if it is not deducted from income tax, the new tax may
cause the companies to make a loss on their operations,” Ramírez said.

The minister mentioned a Venezuelan precedent, the Fiscal Export
Value, which was essentially a surtax imposed on oil companies before
the nationalisation of the industry in 1976.

Under that system, the government fixed an export price for oil,
for tax purposes, about 20 percent higher than the value declared
by the private oil companies, to compensate for the higher prices
the companies were likely to obtain by exporting the crude.

This taxation device continued to be applied after nationalisation,
but PDVSA, in order to increase its resources for spending and investment,
managed to get it revoked in the 1990s.

Under the new law, PDVSA will be able to deduct its contributions
to government development funds from its payments of the new tax,
and the executive branch reserves the right to exonerate, partially
or totally, certain oil shipments that are covered by special international
cooperation agreements.

Proportionally, then, the tax burden will fall most heavily on the
foreign oil companies that operate in partnership with PDVSA, including
the U.S. Chevron corporation, Norway's Statoil, the U.K.'s BP, France's
Total and Royal Dutch Shell.

On Wednesday, Chávez nationalised the country's largest steel plant,
Siderúrgica del Orinoco (SIDOR), after talks to renew the collective
bargaining agreement between the workers' union and Argentine consortium
Ternium, the majority shareholder, collapsed.

The government also recently nationalised the cement industry. So
far this year, the Venezuelan state has renationalised a number of
key aspects of the economy, by means of land expropriations in rural
areas, or acquisitions of companies in the industrial sector.


*****
+ VENEZUELA: Gov't Celebrates British Ruling Against Exxon (http://ipsnews.net/news.asp?idnews=41644)


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