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Editorial Commentary
Oliver L Campbell : New Venezuelan tax
on the extraordinary profits of oil companies
The new windfall tax has had its first reading in the National Assembly. Its name is “Tax on Extraordinary Profits of Venezuelan Oil Companies” (Impuesto a las Ganancias Extraordinarias Petroleras Venezolanas). This is a misnomer since the tax is not on extraordinary profits but on extraordinary sales income. Profits imply revenues less costs, but this tax only looks at income from export sales.
The previous names of “sudden profits” and “excessive profits” have been dropped in favour of “extraordinary profits” but, to all intents and purposes, it is a windfall tax. The National Assembly has come up with a system that is reasonably fair and not too difficult to apply. The computation takes no account of the fact that the oil companies have disparate incomes and disparate costs. Light crudes are worth more than heavy crudes, and production costs can vary from around $5 a barrel to $15 a barrel. The latter applies to production from the Orinoco Oil Belt and includes the cost of upgrading to make the extra-heavy crude, of some 8.5º API, into a viable one.
The Venezuelan government is not known for consulting with the affected parties before passing new tax legislation, and any disaffected oil companies are unlikely to make any public statements for fear they may be asked to leave for questioning the country’s “sovereignty.” Unlike, say, the UK and USA, where the oil companies would certainly criticise any proposed legislation they did not agree with, this recourse, or “derecho de pataleo” is not common in Venezuela.
It is worth noting that the new tax does not really affect PDVSA since the increase in income tax is offset exactly by a reduction in net income. Both tax and net income form part of the National Take, so it is simply money which passes from one pocket to the other.
The proposed tax is not so complicated nor so punitive as many thought it might be. This is because the tax rate on taxable income, currently 50%, has not been increased, and the new tax applies only to increased sales income. The underlying principle is that income of up to $70 a barrel is ordinary, but over that price it is extraordinary and caught in the new tax net. It means the net profit on sales up to $70 a barrel remains unchanged, and it is only the excess which is shared between the company and the government. That is why, in my opinion, the new tax could have been worse for the oil companies and the National Assembly has been reasonably cautious in upping taxes.
The Government Take in Venezuela was already one of the highest in the world, and the new tax aggravates that situation. Following Colombia’s recent oil discovery, a comment in the international press noted that, “Colombia’s heavy oil potential is dwarfed by that of its neighbour Venezuela, which is estimated to have at least 240bn barrels recoverable in its Orinoco belt region. But Colombia has the great advantage of welcoming foreign investment.”
This is only one writer’s opinion, but Venezuela should be careful to avoid being seen as unfriendly towards foreign investors. Measures, such as unexpected tax hikes, may well scare off potential investors since oil companies do not like the goal posts being moved once play has started.
I do not know how the new tax will be calculated as the government has provided no examples. However, the following examples, based on a company that sells 10,000 barrels a day, show one possibility:
Case 1. Average price $70 a barrel
Case 2. Average price $90 a barrel
Case 3. Average price $100 a barrel
The effective tax rate above applies to sales only. The company’s effective tax rate is another figure. It can be seen the effective tax rate increases with the excess over $70 a barrel.
Oliver L Campbell, MBA, DipM, FCCA, ACMA, MCIM was born in El Callao in 1931 where his father worked in the gold mining industry. He spent the WWII years in
England, returning to Venezuela in 1953 to work with Shell de Venezuela (CSV), later as Finance Coordinator at Petroleos de Venezuela (PDVSA). In 1982 he returned to the UK with his family and retired early in 2002. Petroleumworld does not necessarily share these views.Editor's Note: All comments posted and published on Petroleumworld, do not reflect either for or against the opinion expressed in the comment as an endorsement of Petroleumworld. All comments expressed are private comments and do not necessary reflect the view of this website. All comments are posted and published without liability to Petroleumworld.
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Petroleumworld News 04/08/08
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