In Pursuit of a Modern Tax System to Accommodate Foreign Investment. Case Study: Venezuela

Abstract

Venezuela's tax regime has moved from territorial to one of worldwide taxation. However, dividends received from a foreign corporation (whether or not domiciled in Venezuela) are exempt from Venezuelan tax, unless the foreign corporation has a permanent establishment in Venezuela. Its controlled foreign corporation rules (International Fiscal Transparency Regime or IFTR) apply to entities resident in low-tax or tax haven countries. Income of these foreign subsidiaries is deemed to be actually distributed to the Venezuelan owner unless at least half of the subsidiary's income-producing assets produce active business income. The IFTR is one example of steps Venezuela has taken in order to conform its international tax regime to modern standards. Itself a developing country, Venezuela has acknowledged usefulness of tax incentives to attract foreign investment. With an eye toward enhancing its competitive position among countries in the region, Venezuela has participated in the Southern Common Market (MERCOSUR) and a number of other multilateral inter-governmental organizations to coordinate tax policy. Other features of Venezuela's legal regime may undermine its ability to promote enhanced investment. These include its status as a country that does not provide legal protection for physical and intellectual property rights.