Managing the Venezuelan exchange control system

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.