OPERATING AGREEMENTS AS VEHICLES FOR THE DEVELOPMENT OF RESERVED ACTIVITIES, EFFECTS THEREON OF THE INDUSTRY AND BUSINESS LICENSE TAX
| Jurisdiction | Derecho Internacional |
(Mar 1999)
OPERATING AGREEMENTS AS VEHICLES FOR THE DEVELOPMENT OF RESERVED ACTIVITIES, EFFECTS THEREON OF THE INDUSTRY AND BUSINESS LICENSE TAX
Torres Plaz & Araujo
Caracas, Venezuela
Summary
This paper intends to cover our considerations about an issue that eventhough dormant in the last few years is seemingly to arise under the Venezuela's oil opening ("apertura petrolera" since the rediscovery of the "operating agreements" vehicle, and the increase -sometimes beyond rationality- of Municipal taxation. Notwithstanding, -issue of domestic constitutional and legal framework, it is of relevance- both as a matter of principle (i.e. under Venezuelan Constitution) and because of the economic deterrant that excessive taxation (adding the likeliness of multiple taxation and the nature of the tax as regressive) is to investment in the oil sector, not only because of the lack of certainty for investors, but for the scenario or cycle that is undergoing the international oil business nowadays.
Our Constitution provides that hydrocarbon activities are reserved to the Republic of Venezuela (Federal Government) in its Article 136, and the "Ley Orgánica que Reserva al Estado la Industria y el Commercio de los Hidrocarburos ("LOREICH") commonly referred to as either "Nationalization Law" our "Reserve Law") provides for the activities reserved and the vehicles through which the same are to be carried out (covering the "Operating Agreements", inter alia). On the other hand, the Constitution grants limited taxing powers to Municipalities (Article 31), among which the same may establish (create) the Patente the Industria Y Comercio, which can be translated as a Business and Industry Licence Tax, which has developed in the last few years as a tax on business activities based on a percentage of the gross income (revenue) of the taxpayer.
Therefore, the essence of the issue under analysis in question lies in a review of the constitutional bases for the inapplicability of municipal taxation, in particular of the Patente de Industria Y Comercio, to Operating Agreements entered into pursuant to the heading paragraph of Article 5 LOREICH. Particularly, whether services rendered under Operating Agreements are encompassed under the scope of Article 1 LOREICH and thus fall under the execution of activities reserved to the Republic of Venezuela (Federal Government) or not; and being the case the same are reserved activities whether they are or not subject to Municipal taxes.
In addition, we refer to a secondary and subsidiary issue currently under analysis in our Tax Courts, namely, whether the reimbursement of Capital costs incurred by contractors under Operating Agreements, and interests thereon are subject to the Municipal Tax of Patente the Industria Y Comercio.
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For the purposes of both analyses we have chosen as a vehicle, the applicable model Operating Agreement in areas such as exploration and production (upstream activities), with the hope of establishing a clear framework for reference.
In any case, although a complete presentation on the exclusion of the activities developed under the Operating Agreements goes far beyond the limits of this paper, we intend for thus paper to contribute to draw some conclusions on the subject under analysis in order to create the necessary discussion to arrive into a sound solution.
I said sense, of this paper is structured as follows.
I. Operating Agreements under Venezuelan Law, II. Municipal Tax on activities performed under Operating Agreements, III. Taxability under Municipal Tax of the profits obtained through reimbursement and interest there on unrecovered Capital Costs, IV. Conclusions.
I. OPERATING AGREEMENT UNDER VENEZUELAN LAW
The turn of the decade and the need faced by the national oil industry has faced to increase production under the commercial threshold assigned to Venezuela in the world energy markets have drawn attention to the possibility of allowing the private sector to invest in non-core areas of the oil industry, all within a framework characterized by a heavy tax burden being borne by the Venezuelan oil industry coupled with a strict allocation process for amounts destined for new investments, directing them -when possible- to those scenarious representing the highest profit margins, i.e. light and medium crude oil exploitation in already explored and developed areas, all encompassed under what has been known as the Venezuela's oil opening ("Apertura Petrolera").
Depletion of reservoirs in matured fields due to the use of primary or traditional methods for exploiting the crude, running hand by hand with the expectation of an increased output by harnessing the necessary elements of capital, technology and qualified personnel, ended up in the rediscovery and enhancement of an old vehicle for carrying out hydrocarbon activities in Venezuela, such as the "operating agreement."
Apart from the traditional vehicle covered under the Venezuelan legal framework for private parties to engage in hydrocarbon activities, which was the traditional concession contract; from 1967 onwards the Venezuelan Hydrocarbons Law covered two other vehicles through which private investors (mostly overseas
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investors) could perform said activities. Said vehicles were consistent with the trends of that time1 and eventhough covered under the somewhat misleading term of "services agreements", the same reflected two very different vehicles, namely, an association (joint venture agreement) vehicle between the Venezuelan State instrumentality "Corporación Venezolana del Petróleo" (CVP) and the private investors; and, in addition to those, real operating or service agreements where the private investor performed, simply, as a contractor of the CVP.2
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In said sense, it has been said by the doctrine that "...Either case, the fact is that the 1967 law-maker, in response to a general feeling shared by a variety of sectors in the Venezuelan society, sets aside from the vice atmosphere of the concession and creates a new legal instrument when devoting the "assignment" of areas in favor of autonomous institutes and state-owned companies empowered to carry out the exploration, exploitation, manufacturing or refining and transportation by special means of hydrocarbons, pursuant to the laws set forth by the law-maker himself.
The first five drilling rig service agreements were signed by the end of 1971, and comprised two blocks of fifty thousand hectares each, situated at the south of Maracaibo Lake, on the basis that in many cases outdid those agreements timely approved by Congress. It is only left to wait for its fulfillment in order to be able to appreciate whether they are effectively a convenient and attractive formula for the interest of the Nation in the area of hydrocarbon exploitation.".3
As to the definition of said service agreements under the 1967 Hydrocarbons Law it has been said that "...there is no definition concerning service agreements. Neither an official document of the Venezuelan government nor a legal text define service agreements, a curious thing indeed. In 1967, the 1943 Hydrocarbon Law was amended. The amendment aimed only and exclusively at including the legal text to the so called service agreements. One only article of the Law was amended: Article 3°, referred to herein below. However, the law maker carefully drew up that Article 3°, particularly in relation to the section being added, so as not to mention, qualify or name service agreements. The title service agreements is not found in the text of the Law. Some people, in the face of this absence, try to find by analogy the definition of service agreements in article 1630 of the Civil Code, which defines work contracts as follows: "The work contract is that by means of which one part is bound to perform a specific task by itself or under its direction, under a price the other party is bound to accept." However, this definition of the Civil Code does not fit what it is understood by service agreements, indeed. The basis and standards set forth by the National Council of Energy in regard to service agreements does not define such term and simply affirm that: "Service agreements are basically a way of contracting by one part of the Corporación Venezolana del Petróleo the areas assigned thereby." Pursuant to the amendment introduced to Article 3° of the Law, such article may be outlined as follows: 1°) It is maintained, as set forth by all the previous laws, the power of the State to exploit directly. A fact derived from the original ownership of the mines. 2°) The concession systems are maintained ... however, not even the 1967
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law-maker set aside the system of concessions from Article 3° of the Hydrocarbon law. The innovation consists of contracting through autonomous institutions or state-owned companies. It is the way it was drawn up what would help us find the forms. The three basic forms of this new contracting system which receives the generic name of service agreements, though it does not correspond to the legal reality of them, is an inappropriate, artificial, capricious way to call at least two of these forms. The first form is "direct agreements", which in fact represent real service agreements pursuant to the civil legislation. In compliance with these contracts, the Corporación Venezolana del Petróleo, in its capacity as state-owned entity, hired the rendering of a service that can either be exploration, exploitation, refining or transportation, by paying to the party rendering the service or carrying out the work in money or in kind, or part in money and part in kind. Another form is that of "partnership agreement" also provided for in our civil legislation; the Corporación Venezolana del Petróleo or the autonomous institute or a state-owned company appointed by the...
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