Carpe Diem Report
The National Assembly has approved (in first reading) a Bill to Reform the Tax on Large Financial Transactions Law which imposes a tax on certain transactions made in foreign currencies, cryptocurrencies and crypto assets, thus causing deep concern among those potentially impacted and those who ignore the exact scope and the details of the Law.
The reform is part of 23 bills intended for discussion and approval in the legislative agenda of 2022. The bill, consisting of eight articles, was introduced by Congressman Ramón Lobo, member of the Economy, Finance and National Development Permanent Committee, and who served as President of the Central Bank of Venezuela.
The Tax on Large Financial Transactions (IGTF) has been in effect in Venezuela since February 2016 when the Law was published in the Official Gazette. However, at that time the dollarization had not moved significantly forward and there were no custody accounts in dollars as those existing currently in the financial system.
The reform now aims at imposing a tax rate on debits and transactions made in foreign currencies by or through banks at least equal or higher than the tax rate imposed on debits in bolivars. Similarly, the bill would impose a tax on those transactions made outside the financial system, but specifically to the so-called “special taxpayers”.
According to the Bill, the approval would align the taxation system with the new financial products developed by banks. Specifically those accounts in dollars that approve payments in bolivars at the time of disbursement. Moreover, among the main motivations that the promoters highlight to pass the bill is the claim that the reform would encourage the use of the bolivar to support the gradual strengthening of the national currency.
The Ministry of Finance is convinced that amid a lower inflation, imposing a tax on large transactions in dollars would help recover the demand for bolivars.
In fact, it is not the first time that the introduction of a tax imposed on transactions in foreign currencies is proposed. In November 2020, the Minister of Finance, Delcy Rodriguez, publicly announced: “The tax imposed on transactions in foreign currencies within a financial entity will be higher than the Tax on Large Financial Transactions of operations in bolivars”.
However, more than a year has passed since the Minister of Finance regarded the Tax on Large Financial Transactions Law as the channel to impose a tax on large transactions in dollars.
The bill is discussed in a context where Delcy Rodríguez has said at the National Assembly that “the bolivar is and will be the bastion of our monetary sovereignty” and the dollarization “would be the biggest historical mistake in our Republic”.
It is worth highlighting that the reform introduced will only impose an additional tax on:
a) The transactions made exclusively in foreign currencies within the national banking system.
b) The transactions made in foreign currencies outside the national financial system by taxpayers (special taxpayers).
The issue lies in what is one of the features of this Law. Previously, the Law was applicable to special taxpayers and now will be applicable to any natural person (although they are not special taxpayers), and corporate entity. Meanwhile, according to the Law, the special taxpayers are those companies with a gross annual income threshold of over 30,000 tax units (US$ 129), a non-significant income amount that in practice includes all companies in this category.
The bill imposes a rate on these transactions ranging from 2% to 20%, but proposes to start from 2.5% (above the current rate for transactions in bolivars which is 2%) in the case of any transaction made in foreign currency as long as the National Executive Branch imposes a different rate.
Moreover, it is worth highlighting that the statement of reasons of the bill notes that the IGTF that is currently charged in bolivars collects near 13% of all tax revenues in the country. With the entry into force of the tax on transactions in foreign currencies, crypto assets and cryptocurrencies, the total tax collection is expected to increase to 18.4%.
Of course, as any tax, if the bill is passed, the tax on large financial transactions in foreign currencies will trigger behavioral changes that will certainly encourage the use of cash and push those taxpayers subject to the tax imposed on regular non-banking transactions towards the informal field.
