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Editorial Commentary
Oliver L Campbell: Windfall Tax -
The Law on Special Contributions
It is surprising the “Economist Intelligence Unit” can make two mistakes in just two sentences, “The government anticipates it will raise an additional US$9bn in annual revenues from the tax. However, some independent analysts have called the sum exaggerated, especially if oil prices decline from recent peaks.”
A summary of the new law will be useful to understand how it raises additional funds for the government. First, the impost, called a “special contribution,” is levied on “extraordinary prices” of oil which are those over $70 a barrel. It is not an income tax since it is not imposed on income and, moreover, the special contribution is considered a cost which is tax deductible. Second, the prices that companies realise from the sale of oil in no way affect the calculation which depends only on the price of the Brent marker crude. Third, the law allows for certain exports to be exonerated from this impost--probably those volumes exported under agreements with Cuba and other Caribbean countries. Fourth, the contribution passes to a government body called the National Development Fund (Fonden) and not to the National Treasury.
The new impost kicks in when the price of Brent crude exceeds $70. The excess is multiplied by 50% and this value is applied, on a monthly basis, to the barrels exported. For instance, if Brent is quoted at $80 a barrel, the calculation is ($80 - $70) x 50% = $5. However, the impost does not stop there since, when the Brent quote exceeds $100, the excess is multiplied by 60%. The present price of Brent is around $110 so the two-tier calculation is ($100- $70) x 0.5 + ($110 - $100) x 0.6 = $21 which is applied to the barrels exported.
There are 260 days from 16 April, when the new law was passed, to the year end.
Let us assume that, during this period, Venezuela exports 2,000,000 b/d which are subject to the impost and that 1,700,000 b/d are exports by PDVSA and 300,000 by the private oil companies. Further, let us assume that, for those 260 days, Brent crude is, on average, quoted at $105. The calculation supports the Oil Minister’s contention that the special contribution will reach $9 billions.520 x ($100 - $70) x 0.5 = $7,800 millions
520 x ($105 - $100) x 0.6 = $1,560 millions
Total $9,360 millionsHowever, the Economist is wrong in saying this will be additional revenue. Most of it comes from PDVSA and, as will be shown later, that is not additional revenue.
The amount contributed by PDVSA from 1,700,000 b/d of exports is as follows:
442 x ($100 - $70) x 0.5 = $6.630 millions
442 x ($105 - $100) x 0.6 = $1.326 millions
Total $7.956 millionsThe amount contributed by the private companies from 300,000 b/d is as follows:
78 x ($100 - $70) x 0.5 = $1,170 millions
78 x ($105 - $100) x 0.6 = 234 millions
Total $1.404 millions
As the contributions are tax deductible at 50%, PDVSA’S net profits are reduced by $3,798 millions and the private companies’ net profits by $702 millions.It is important to note the $9,360 millions are not “fresh money” because $7,956 millions emanate from PDVSA and, from the example below, it is evident that, in the case of PDVSA, the special contribution is just a transfer from one pocket to another.
Petróleos de Venezuela SA
Example of the Statement of Net Income
In millions US$
to Fonden
to FondenThe sum of income tax and net income in the column “No payment to Fonden” is $18,000 millions but with “Payment to Fonden” the sum falls to $10,000. The difference between the two is exactly the amount of the payment to Fonden. In both cases, the National take remains the same.
So the only fresh money comes from the private companies which contribute $1,404 to Fonden but, as that sum is tax deductible, the effective contribution to the Nation is $702 millions. While the government will welcome receipt of this sum, it is a far cry from the figure of $9,000 millions which has caused all the excitement in the international press.
The Economist is also on shaky ground when it states the sum of $9 billions is “exaggerated.” It only needs Brent to remain at $105 and, as seen above, the contribution will reach $9.4 billions. Also, the export figure of 2,000,000 b/d used in my example will almost certainly be exceeded.
As a general comment, every method designed to compute a windfall tax has its defects. The one devised by Venezuela is no exception because it takes no account of realised prices but depends on an extraneous factor--the price of Brent crude. This 39º API crude is one of the world’s most expensive, whereas Venezuela mainly produces heavier crudes with a high sulphur content which are worth much less. However, the fact the Brent indicator would always stay ahead of realised prices was something the government counted on when devising the new impost.
There has been criticism in Venezuela about diverting funds from the National Treasury to Fonden since many believe PDVSA should not directly finance development projects. However, the precedent already existed with PDVSA’S direct financing of social projects.
Nobody likes paying more taxes, whatever they are called, but the feedback I have from one private company is that it could have been worse.
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 04/23/08
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