Upcoming Legislation in Venezuela: Special Economic Zones

Venezuelan writer Luis Britto Garcia takes a critical look at the new legislation going through the National Assembly

By Luis Britto García *

The initial drafts of the Law of Special Economic Zones were approved by the National Assembly on April 27, receiving the backing of all United Socialist Party (PSUV) and opposition deputies. Only Oscar Figuera (Popular Revolutionary Alternative – Communist Party) voted against them, claiming that the law favored “capital” over “Venezuelan workers’ interests.” The final text is expected to be approved in July. The following is an evaluation of the drafts by award-winning Venezuelan writer Luis Britto García.


Two whitepapers relating to the Organic Law of Special Economic Zones are currently with the National Assembly’s Economy, Finance and Development Commission. Both are complementary, and once the first is passed, the second will be presented for approval.

Special economic zones

A special economic zone (SEZ) is “a geographic region that has special laws oriented to a greater extent to a free market economy, as opposed to the typical laws of a country or nation. ‘National’ laws can be suspended within a special economic zone (…). In general, the purpose of this type of structure is to increase direct foreign investment by foreign investors, such as an international company or a multinational corporation. (…) However, these areas have not been exempt from criticism, as they enjoy lower tax rates or, in some cases, violate the fundamental rights of workers as legislation is more relaxed than in the rest of the country.”

Components

As such, it is evident that all SEZs, whatever the rhetoric used to disguise them, consist of the following four components:

1) “Counter position to the typical laws of a country or nation. ‘National’ laws can be suspended within a special economic zone.”

2) An intention to “increase direct foreign investment by foreign investors, such as an international company or a multinational corporation.”

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3) Foreign investors are granted “lower tax rates.”

4) “Rights are often violated. Fundamental workers’ rights are impacted as legislation is more relaxed than in the rest of the country.”

Each and every one of these elements are included in the two projects currently with the National Assembly’s commission. We comment on the one that we were able to access.

Foreign investment

The subject benefiting from this project is foreign investment. The law’s statement of motives indicates that the SEZs are “territorial spaces for the attraction of national and foreign productive investments based on economic (fiscal, financial and customs) stimuli.”

Article 2 states: “This law is applicable to natural and legal persons, as well as public and private, mixed and communal, national and foreign companies.” The mention of “national productive investments” is an empty gesture: historically these types of investments brought less than 2% of the foreign currency that enters the country each year.

Article 6 also indicates that with the SEZs “the commercial generation of new currencies is pursued.” It is doubtful that a traditionally currency-exporting sector can now generate new hard currency income.

Article 8 cites “geographical and economic conditions that favor the integration of production processes by foreign companies” as being among the conditions to install a SEZ.

Article 21 guarantees that investors will be privileged with an “integrated single window system under the Ministry of Foreign Trade,” an office that, as its name reveals, specializes in relations with foreign entities. The details, which appear on the second whitepaper, are not yet subject to parliamentary discussion. However, they confirm that the SEZ’s legal regime is tailored for transnational investments.

Lower tax rates

A privileged tax regime will be implemented for these primarily foreign investors.

Article 1 of the whitepaper rules that those who operate in said “geographic spaces” will be conferred “economic incentives.”

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Article 4, numeral 1, provides that “a special and extraordinary socioeconomic system” will govern them, obviously different from the one in place in the rest of the country.

Equally, article 19 establishes that in the “investment agreements” automatic, total or partial tax refunds on import tax, tax income and value added tax (VAT) may be granted based on the progress and nature of the investment projects for a period of up to ten years. Similarly, exemption from the applicable import and export regulations and rules for inputs, raw materials and capital goods for the production of goods and services for export, plus other incentives conferred at the discretion of the president, may be applied.

The so-called SEZs thus become investors’ tax havens to the detriment of the Venezuelan treasury. In this regard, it is important to remember that tax matters are of public concern and that, according to article 137 of the Constitution, legal reserve issues must be governed exclusively by law and never by “agreements”: “No tax, rate, or any contribution that is not established by law may be charged, nor may exemptions and rebates be granted, or other forms of tax incentives granted, except in the cases provided by a law that creates the corresponding tax.”

Additionally, granting of such privileges to foreign entities violates article 301 of the Constitution, according to which “The state reserves the right to the use of commercial policy to defend the economic activities of national public and private companies. Regimes more beneficial than those established for nationals may not be granted to foreign companies and organizations or persons. Foreign investment is subject to the same conditions as national investment.”

Natural resources and hydrocarbons

Natural resource extraction is conceived as a priority area of economic activity in the SEZs.

According to article 5 of the whitepaper, “SEZs are organized and defined according to the availability of natural resources.”

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Article 8 states that they will be established in territories with “important concentrations of natural resources that allow their transformation into industrial processes for export and the domestic market.”

Article 13 adds “energy, hydrocarbons and their derivatives” among the “prioritized sectors” for said zones.

In this regard, it is important to remember that article 302 of the Constitution says: “The State reserves to itself, through the pertinent organic law, and for reasons of national expediency, the petroleum industry and other industries, operations and goods and services which are in the public interest and of a strategic nature. The State shall promote the domestic manufacture of raw materials deriving from the exploitation of nonrenewable natural resources, with a view to assimilating, creating and inventing technologies, generating employment and economic growth and creating wealth and wellbeing for the people.”

Initiatives that unconstitutionally privilege foreign investment, prioritize its participation in our natural resources and cede national territory in areas which are subject to different laws – some in border or coastal regions of decisive strategic importance – should be opposed.

* Luis Britto Garcia is probably Venezuela’s most highly regarded living writer. He was recently appointed as the coordinator of the Venezuelan chapter of the Red de Intelectuales y Artistas en Defensa de la Humanidad [Network of Intellectuals and Artists in Defense of Humanity]. A firm supporter of the Bolivarian Revolution, he has written numerous plays, novels, historical works, and film scripts in addition to regular political commentary.

Translation by Paul Dobson for Venezuelanalysis.

Published at venezuelanalysis.com