Venezuela May Ease Up On Oil Tax Regime For Current Auction

by Mike Godfrey, Tax-News.com, Washington

01 February 2010

The project coordinator for the Carabobo oil block auctions, Baldo Sanso, has pointed to more relaxed tax conditions attached to the current round of auctions with doubts arising as to how many bidders could be attracted. The bidding on the Carabobo block in the Orinoco oil belt has been delayed more than nine months and follows a devaluation of the Bolivar official rate which moderated bidders' potential local costs.

Oil companies have been deterred by an April 2008 windfall tax law passed when oil prices went above USD100 per barrel. The windfall tax kicks in when oil prices exceed USD70 per barrel. Sanso said the tax still applies to the Carabobo project, but changes are being considered.

He told Globovision, "(the windfall tax) makes sense for projects already underway, but for new projects the investor needs the prospective gain to be productive. I think it (the tax) has to be revised. It would improve the economics of the project, but by tomorrow (the time of the auction) it will not be possible."

Companies themselves have demanded greater guarantees to the Venezuelan authorities to participate in this tender and at the same time asked for more favorable tax conditions to reduce downside risks.

Venezuela has agreed to lower oil royalties from 30% to 20%. A rebate would become effective in 2016, but only if the oil developments had not become economic by that date (the precise conditions are outlined in Articles 44-48 of the Hydrocarbon law). Other taxes such as the 50% rate of income tax still apply.

It is understood, however, that a number of companies would not bid because of the windfall tax. The results of the bidding are due to be announced on February 10.

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