Taxing authority and tax law

Tax authority: Venezuelan Tax Administration (SENIAT)

Tax law:

• 2001 Master Tax Code: Chapter III, Articles 109 to 111, and 220 to 229
• 2001 Venezuelan Income Tax Law, Chapter III, Articles 112 to 170
• 2007 Income Tax Law Reform, Article 118 - inclusion of thin capitalization rules

Relevant regulations and rulings

On February 2007, a partial reform of the Income Tax Law and rules in thin capitalization were published in the Official Gazette No.38.628. The thin capitalization rules apply, as of fiscal year 2008, to where a Venezuelan taxpayer or a Venezuelan Permanent Establishment has debt (controlled debt) to companies or individuals who are considered related according to Title VII, Chapter III, in the transfer pricing rules. The main inclusions are as follows:

• Taxpayer will have a limited possibility to deduct interest expenses resulting from related parties’ loans when the average of its debts (with related and unrelated parties) exceeds the amount of the average of its equity for the respective fiscal year
• The extent of debt that exceeds the taxpayer’s equity will be treated as equity for income tax purposes

OECD guidelines treatment

The 1995 and its subsequence updates of the OECD guidelines are applicable as a supplement to these rules for everything else not considered in the Venezuelan Income Tax Law.

Priorities/pricing methods

The acceptable methods are OECD methods: CUP, Resale Price, Cost Plus, Profit Split and TNMM. Priority is given to the CUP method.

Transfer pricing penalties

By failing to apply the transfer pricing methods, the taxpayer faces fines from 300 to 500 Tax Units.¹ In addition, there will be a fine ranging from 25% to 200% of the omitted tax amount, and late payment interest may also be added to these amounts in the case of a transfer pricing assessment. Failing to issue the transfer pricing informative return (PT-99) will trigger a penalty of 10 to 50 Tax Units.

Penalty relief

If a taxpayer complies with a transfer pricing method, this could be considered a mitigating circumstance in the determination of an assessment. This penalty relief is based on previous tax audit procedure and assessments, but there is not a legal provision to support it.

Documentation requirements

Effective in 2002, taxpayers are required to prepare and maintain supporting and extensive contemporaneous documentation. The documentation requirements include functions, assets, risks, organizational structure, business descriptions, detailed information of all operations with related and non-related parties, audited financial statements, agreements and contracts, reasoned method selection, inventory valuation method (if applicable), analysis results and other relevant information.

Documentation deadlines

The taxpayer must prepare documentation by the filing date of the annual income tax return at the end of every fiscal year. In addition, the taxpayer must submit the documentation upon request by SENIAT during a transfer pricing audit. It is mandatory to file the transfer pricing informative return (PT-99) during the month of June for those taxpayers who have their fiscal year ending in December. In other cases, the filing deadline will be six months after the specific year’s closing.

Statute of limitations on transfer pricing assessments

The statute of limitations is four years from the date of filing the return and six years if the taxpayers failed to comply with the filing of any tax return, such as an income tax return, VAT returns or customs duties returns. PT-99 is not considered a tax return.

Return disclosures/related-party disclosures

A controlled party’s information return must be filed during the six months immediately following the closing of each tax year. The PT-99 form is available in the tax authority’s website (www.seniat.gob.ve).

Audit risk/transfer pricing scrutiny

SENIAT has been very active in transfer pricing audits lately. In the general tax audits has added transfer pricing as a relevant topic to be audited. Thus far, audits have been performed on taxpayers in the oil industry, pharmaceutical industry, service providers, consumer products industry, automotive and steel and iron producers.

SENIAT has issued several transfer pricing assessments to relevant multinational corporations in diverse industries, which have been publicly informed, and the assessed amounts ranged from US$ 5m to US$ 67m.

The audits have been organized by industry and the taxpayers are selected by:

• Having inconsistency between the transfer pricing report, income tax return and the transfer pricing informative return
• Using the TNMM
• Using non-updated financial information from comparable companies up to June of the fiscal year subject to study
• Having profit level indicators below the interquartile arm’s length range
• Showing lower operating margins compared with operating margins from the previous year

The risk of transfer pricing scrutiny is high when a taxpayer performs financial operations directly or indirectly with related parties and when taxpayers have technical assistance or know how agreements with related parties abroad.

APA opportunity

Unilateral and bilateral APAs are available to the extent that they are carried out with nations that have outstanding double taxation treaties (see Income Tax Law Articles 143 to 167, and Master Tax Code Chapter III, Articles 109 to 111, and Articles 220 to 229).

¹ 2010 Tax Unit = BSF 65/unit.

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