Since January 23 2003, an exchange control regime authorised by the Venezualan Central Bank (BCV) has been in force in Venezuela, strongly restricting the sale and purchase of foreign currency.
This restricted currency market was initially developed by Exchange Control Convention Number One, and was then reviewed by several other Exchange Control Conventions. Resolutions were issued by the BCV and administrative orders issued by the exchange control authorities (CADIVI).
The main bans and sanctions relating to the exchange control are stipulated in the Law on Exchange Control Violations. The sanctions consist of heavy fines that could amount to double the operation in foreign currency or its equivalent in bolivars. Other monetary sanctions are calculated on tax units: equivalent to 90 Venezuelan Bolivars (VEB) or approximately $20 at the official exchange rate. Some exchange violations are punished with imprisonment, although this sanction has not yet been widely implemented.
Investment constraints
Besides the general restriction on the sale and purchase of foreign currency, the main constraints affecting investments in Venezuela are linked to the export of goods and services (foreign currency from exports shall be sold to the BCV at the official exchange rate), and the import and export of foreign currency (foreign currency exceeding $10,000, or its equivalent amount in other currencies, must be declared to the BCV).
Offers in foreign currency made between Venezuelan entities or individuals for the sale of goods and services are prohibited. The law does not define what an ‘offer' is. In our opinion, offers should be understood as commercial agreements, proposals and invoices in foreign currency. This restriction, in our opinion, is only applicable within Venezuelan territory, and therefore does not encompass offers made to or coming from abroad. Regarding invoices in foreign currency, they are legal when issued to non-domiciled entities and include the equivalent sum in bolivars, at the official exchange rate.
As to currency being used for payment, we believe that despite the exchange control system in Venezuela substantially limiting the access, use and circulation of foreign currency, the bolivar should not be considered a forced tender in Venezuela. Obligations convened in local currency may therefore be paid in its equivalent in foreign currency, at the official exchange rate, and vice versa, except for a few exceptions expressly provided by special laws, such as real estate leasing and consumer protection.
Currency obligations for cash collection and payment are also affected. Cash collection for
services rendered in Venezuela may be in foreign currency if it is in a foreign bank account, but such currency must be sold to the BCV upon entering Venezuelan territory. In principle, foreign currency cannot be deposited in a local bank account.
The only exception so far is provided for foreign currency deriving from the settlement of securities through the System for Transactions with Foreign Currency Securities (SITME). In this case, the foreign currency may be deposited in a local bank account, without sale to the BCV, unless the foreign currency is withdrawn. However, the implementation of this exception is pending complementary regulations.
Currently, there are two official systems for the acquisition of foreign currency. The first is managed by the National Commission for Administration of Foreign Currency (CADIVI), and the second is SITME. Both are controlled by the BCV.
The unofficial market
The unofficial market, also know as the ‘parallel market', arose as an unregulated alternative to meet foreign currency demands caused by limited access to the official systems described. Although the parallel market is generally considered illegal, there are certain mechanisms through which legality can be sustained, giving access to foreign currency without major risk of an exchange violation.
These alternatives allow currency conversion from bolivars to dollars and other currencies, or from the latter to bolivars. One example is the negotiation of commodities, an option now used by many companies. As a matter of fact, the operations in the parallel market are estimated to be peaking at $20bn to $30bn per year.
The implicit exchange rate in the parallel market follows free market principles, but is also influenced by speculative behaviours. It is significantly higher than the official exchange rate, especially when the government is not circulating currency in the market, for example by reducing the emission of debt bonds.
From a tax perspective, the main consequence of such operations is that foreign exchange losses are not deductible from income tax. However, there are arguments to sustain that such exchange losses may be charged to cost of goods in cases of imports of inventory. The loss for the exchange differential between CADIVI and SITME is widely considered tax deductible.
NATIONAL COMMISSION FOR ADMINISTRATION OF FOREIGN CURRENCY
In order to honour payments in foreign currency, every entity in Venezuela must gain the previous approval of CADIVI and the BCV. This process is carried through financial institutions authorised by the BCV – mainly banks. The current exchange rate for CADIVI operations is VEB 4.30 per $1 – this is a fixed rate. The official exchange rate may be changed by the BCV, particularly when the government determines bolivar devaluation.
Only the following payments are entitled to CADIVI: dividends and capital repatriation, provided the foreign investment was registered before the Superintendence of Foreign Investment (SIEX); importation of certain goods and technology (some imports require a Certificate of No Production in Venezuela); royalties derived from licenses to use trademarks or patents also need to be registered before SIEX; and agreements pertaining to technical assistance or technological service fees also require previous registration before SIEX.
Approvals by CADIVI are very slow: for dividends and cash repatriation it may take several months, even years. Only certain imports – mostly food, medicines and some raw materials – are approved quickly. CADIVI operations represent approximately $40bn per year. Another huge devaluation of the official exchange rate is generally expected to be announced by early 2013.
SYSTEM FOR TRANSACTIONS WITH FOREIGN CURRENCY SECURITIES (SITME)
SITME is a system through which the government negotiates public debt bonds in US dollars traded in bolivars. Any acquisition of securities in foreign currency, or to be settled in foreign currency, must be carried by the BCV through SITME. This process is also carried through institutions authorised by the BCV.
This system resulted from the closing of the swap market, which until 2010 was conducted by brokerages. Hand in hand with this measure, an amendment to the Law on Exchange Violations included the term ‘securities' in the definition of foreign currency, extending the limitation of acquisition of foreign currency to the swap of securities. Before this, the swap of securities was a common way to acquire foreign currency. As a result, SITME has been used as a second-tier exchange control, after CADIVI.
SITME is only available for the following payments: imports that are not entitled to CADIVI; imports that being entitled to CADIVI are not approved within a 90-day period; and imports of raw material, capital goods and other goods and chattels.
Unlike CADIVI, SITME has a maximum limit of securities that could be acquired. In the case of legal entities, this limit is $350,000 per month, with a maximum daily amount of $50,000, or the equivalent amount in other currencies.
Also unlike CADIVI, the approval of requests before SITME is down to the discretion of the BCV. The applicant has no right to be granted the securities requested, even when in compliance with all requirements of law. The applicant only has the right to apply according to the terms and conditions required by law, and to obtain a response from the institutions authorised.
The SITME rate of exchange is variable, determined by fluctuations in the market. The BCV publishes a daily price band, in bolivars, for the purchase and sale of securities traded through the system. The exchange rate has been stable at approximately VEB 5.30 per US dollar. SITME operations are equivalent to approximately $100m per day.
