Photo showing US dollar and Venezuelan Bolivares notes in Caracas on July 16, 2013. In a country with strict currency exchange control since 2003, Venezuelans in urgent need of dollars to travel lined up on banks Tuesday --the deadline to buy dollars for the first time at an auction-- looking forward to get more currency than the allowed, despite being at a higher rate than the official. AFP PHOTO / JUAN BARRETO (Photo credit should read JUAN BARRETO/AFP/Getty Images)

Formalizing a Rogue Economy in a Rogue State

The ANC is looking to modify the VAT law to tax transactions in dollars. What does this mean?

Photo: Time, retrieved.

In parallel Venezuela, the one were laser raves in luxury hotels and Ferraris parked in front of posh restaurants are a common sight, the National Constituent Assembly (ANC) is looking to start taxing sales in U.S. dollars. 

Since nothing is easy to understand in Venezuela, we have to explain certain things before we go on: 1. As reported by Nicole Yapur in this Bloomberg piece, almost 70% of all commercial transactions taking place in Venezuela are in foreign currency (dollars, mostly) and 2. The ANC is an illegal entity controlled by chavismo, that sometimes usurps powers of the legislature. 

Maduro’s “economic reform” happened off the books. The only way the regime was capable of giving some oxygen to the Venezuelan economy was to disappear.

So, the regime is looking to have the tax administration (SENIAT) catch up on taxing all those juicy transactions in dollars that have eluded them. Does this mean that sales in foreign currency were exempt from VAT? Absolutely not. All sales within the territory are subject to a 16% VAT; this is just a confirmation of what we’ve been explaining here for the past months: Maduro’s “economic reform” happened off the books. The only way the regime was capable of giving some oxygen to the Venezuelan economy was to disappear. And disappearing implies ignoring exchange and price controls, as well as the enforcement of labor and tax laws.

And since the “transactional dollarization” of the Venezuelan economy is not formal, there’s little control that can be excised over these transactions that happen in cash or through a foreign financial system.

It makes sense that chavismo now wants to push forward laws that allow it to formalize an economic reform and get business owners in line and paying taxes over successful operations. Plus, formalizing this reform is something that many people have been waiting for, especially their foreign partners (the Russians!), who are hoping to have their real stake in the Venezuelan oil industry signed over in black and white.  

There’s just one little problem (well, actually many more than one): they don’t have a legitimate legislature to approve the reform. 

Plus, formalizing this reform is something that many people have been waiting for, especially their foreign partners.

Any changes they make to economic laws would be illegal, and it’s doubtful that they’ll run it by the National Assembly, since neither side recognizes the other as a legitimate authority.   

Of course, Mr. Cabello’s tax administration will most likely enforce anything approved by the ANC—the head of the ANC, Diosdado Cabello, is the brother of the head of SENIAT, José David Cabello. And, in the end, SENIAT doesn’t really need a legislative modification to tax with VAT transactions in dollars, because it’s already in the law. In any case, what they have to do is eliminate the exchange controls. 

So, what can we expect? Even when they don’t really need an excuse to do anything because this is a dictatorship and they can do whatever they want, we can expect to see some sort of document approved by the ANC (at least to announce that they’re coming to collect). Then, most likely, we’ll see Mr. Cabello pushing to send tax administration officials to audit and bash some heads in local businesses, to get them in line.

This is within chavismo’s first steps towards trying to take control and formalize “Maduro’s economic reform”… although it could also be just to get their hands on all those Benjamins swarming parallel Venezuela’s bubble.