“Not only do they change the bolivar and increase the wage to an amount nobody can pay, but now they’re forcing us to pay more taxes? Prices will go through the roof!”
That’s what Mercedes Uribe, school teacher in one of Caracas’s most populous areas, said after hearing Nicolás Maduro’s mandatory broadcast on Friday, August 17. Along with reforms to tackle the crisis, he presented a series of tax reforms that, although delicate, went unnoticed.
Maduro presented a series of tax reforms that, although delicate, went unnoticed.
First, there’s an increase of the Value-Added Tax (VAT) from 12% to 16%, the second highest aliquot in Venezuela since 1993 and, second, Income Tax (ISLR) collection has been modified, thus affecting two of the most important taxes of the national collection system.
The presidential decree for the VAT increase, published in Extraordinary Official Gazette N° 6.395, will come into force on September 1, and will apply for the remainder of 2018 and 2019. The reform of 2014 already established that the figure should remain in a range between 8% and 16% (so they just fixed it to the legal maximum), but the resolution wasn’t enough: the chavista National Constituent Assembly (ANC) approved, record-fast and without discussion, the country’s tax reform.
The measure seeks to collect the highest amount of income in bolivars for the State, trying to reduce the fiscal deficit: since the country is in hyperinflation, the National Tax Service (SENIAT) has a limited collection capacity. The consultant agency Ecoanalítica said that income through VAT payments between January and June this year dropped by over 74%.
Since the country is in hyperinflation, SENIAT has a limited collection capacity.
Leonardo Palacios, lawyer and head of the Venezuelan Tax Law Association, explains that such a reform doesn’t comply with any of the postulates established in the Constitution. Beyond generating higher fiscal income, reforms should focus on benefiting the people, guaranteeing investment, respecting property rights and boosting a progressive economic system. “The tax reform must be simple, transparent and sufficiently clear for any contributor to understand how, when and where to pay,” he says. In his view, this isn’t the case: it was published with a vague language, illegally, unconstitutionally and violating judicial security, since it was approved via constituent decree (and not the National Assembly).
One example of this can be found in the effects the VAT increase is supposed to have: initially, Maduro said the rate hike would only apply to sumptuary or luxury goods. Days later, Communications and Information Minister Jorge Rodríguez said that “mass consumption goods, goods people need, like food, medicines and agroindustrial goods” would be exempt. But in the presentation before the ANC, Tareck El Aissami, vice-president for the economic area, said the VAT would only apply for luxury expenses.
“Since there’s a contradiction in the gazette, what the president and even what the Seniat announced is incorrect,” said tax expert Camilo London. He explains that the 16% aliquot applies to all goods and services taxed by VAT, and that directly applies to price tags of all products. “As soon as September starts, prices will be adjusted with those percentages.”
As soon as September starts, prices will be adjusted with those percentages.
The VAT Law reform also specifies that the acquisition and import of goods and services considered sumptuary must be paid at 31%, 16% of the general VAT increase plus an additional 15%. This replaces the Tax Unit for the American dollar as an exclusive reference. “We could say that the VAT was dollarized, at least on these items,” sais London in his website Gerencia y Tributos.
None of this, mind you, is discussed on the streets. “I know nothing of numbers or economy,” said Ernesto Pulido, an elderly citizen, “I just know the government wants to screw us however possible. They said so many things that we don’t know what’s the worst.”
“The proposal is to establish a 1% payment on daily sales for special contributors,” said El Aissami, “except in the financial and insurance sectors, which will pay 2%. Payment for monthly Income Tax advances is set to a range between 0.5% and 2% for large contributors.”
Leonardo Palacios says that, with ISLR advances, the government seeks to protect itself from the hyperinflation ravaging the country, through the advance payment of money collected over long periods of time. “That will affect cash flows, the money set for investment, payrolls and the day-by-day of shop owners. The government says ‘pay in advance, we’ll see later if you owe me or if I have reimburse you’.”
Camilo London agrees, “advance payment in an inflationary economy will substantially increase the tax load of companies. The tax hasn’t even been generated and you have to pay anyway,” including companies that aren’t producing earnings.
Advance payment in an inflationary economy will increase the tax load of companies
Palacios notes that, previously, the category for special contributors grouped together large companies with important resources and incomes, which is a minority group in moderate inflation. Today, “everyone’s a special contributor” because of hyperinflation. A small contributor becomes a large contributor, which increases the number of special contributors. More daily tax advances, more money for the State.
Fiscal deficit down to zero
“We’re heading to what we’ve called ‘Zero Fiscal Deficit’, we’ve made the right decisions in this regard, with fiscal discipline, eliminating the issuance of inorganic money. We’ll support the issuance based on the country’s production,” said Maduro.
But every time the State assumes expenses and its income doesn’t grow at the same rate, there’s deficit, made worse by the drop in oil production (even though oil barrel prices are currently above budget). To get more money, there are three possible solutions: increase taxes, ask for loans or issue inorganic money, an option forbidden by article 320 of the Constitution.
Nicolás Maduro himself has admitted that they’re printing inorganic money to finance public spending: “We had to just print money to support socialist programs, housing, bonuses, the bimonthly wage increases.”
Maduro has admitted that they’re printing inorganic money to finance public spending.
Lawyer Juan Cristóbal Carmona says that this situation shows that the Central Bank “has no administrative autonomy” and complies with the Executive’s every instruction. Similarly, he distrusts the promise to bring fiscal deficit down, when the State assumes so many expenses. “The government’s message is contradictory: they say they’re going to scrap inorganic money but they’re taking on extra obligations they didn’t have. Maduro increased salaries, offered a reconversion bonus, said he’d finance salaries for 90 days. Where’s that money coming from? They create money with no relation to the country’s wealth or production,” says the specialist in financial law.
For Leonardo Palacios, far from reducing hyperinflation, these measures will accelerate it. “Everything translates to the final prices of goods and services.” In an interview with Fedecámaras, he mentioned that “the reform could be beautiful if it was coherent, integrated and timely. If they considered that there can’t be an effective fiscal reform if the State isn’t reorganized. That’s something the government hasn’t done.”
At the end of the day, he says, the conclusion is what you expect: citizens will be the most affected, regardless of social class.