Thoughts on the Action for Nullity of the Treaty between Venezuela and the United States of America on the basis of Unconstitutionality
We are awaiting one of the most transcendental decisions entrusted in the Constitutional Chamber of the Supreme Justice Tribunal in its short existence, not only due to the consequences that could arise in terms of the exchange of investments, financing and technology between Venezuela and the United States of America, but also by the repercussions it could have in respect of the network of conventions for the avoidance of double taxation ("DTCs") and for investment promotion and protection of investments ("CPPIs") in force in our country.
The Supreme Justice Tribunal was asked in late April 2000, to rule on the alleged unconstitutionality of the Memorandum of Ratification of the Convention subscribed between the Government of the Republic of Venezuela and the Government of the United States of America for the avoidance of double taxation and for the prevention of evasion with respect to taxes on income and capital ("DTC VZLA-USA"), and its additional protocol, executed in Caracas on January 25, 1999, which had just entered into force on January 1, 2000.
At the proceedings, in addition to the representation of the National Assembly and the Office of the Attorney General of the Republic, the National Investment Promotion Council (CONAPRI) also attended and opposed the action, i.e., to defend the Constitutionality of the DTC VZLA-USA.
The suit was not surprising, sinceit merely embodies what has been the line of thought of the claimants with regards to their views pertaining to Venezuelan public finance policies and the treatment of foreign investment in Venezuela, as laid out in their writ (and in another suit filed against the Investment Promotion and Protection Law, recently downturned by the Constitutional Chamber of the Supreme Justice Tribunal), and it clearly extends beyond the mere analysis of the provisions of the DTC VZLA-USA as sitting under the Constitutional framework.
Regardless of our philosophical and economic considerations on DTCs as adequate and desirable means of avoiding the pathological phenomena of double taxation and fiscal evasion, and as stable framework resulting in certainty for investments to and from Venezuela, as we are dealing with an action for nullity due to unconstitutionality, I shall solely refer to its legal aspects, both in what refers to the arguments of the claimants and those we have presented, as attorneys for CONAPRI at the proceedings.
The claimants base their action on the supposed breach of formalities in the formation and entry into force of international treaties, upon the terms of the 1961 Constitution and the current 1999 Constitution, also requesting the declaration of unconstitutionality of certain Articles of the DTC VZLA-USA due to the alleged violation of Articles 301 and 316 of the Constitution, in particular the writ refers to Articles establishing the mechanisms of distribution of tax powers in matters of maritime and aerial transport (Article 8 DTC), dividends (Article 10 DTC), interest (Article 11 DTC) and royalties (Article 12 DTC), indicating that they establish a more beneficial system for investment in Venezuela by foreign individuals and companies than that available for Venezuelan nationals and hence claiming a supposed discrimination for Venezuelans; finally, they request the nullity of Article 26.1 of the convention (mutual agreement procedure), by stating that according to their reading tax controversies arising in Venezuela are to be submitted to arbitration by US authorities.
All the above arguments for unconstitutionality are devoid of basis. As we sustained throughout the proceedings at the Constitutional Chamber, the DTC VZLA-USA is Constitutional in both its formal and material aspects. In fact, we believe this to be a golden opportunity for the Constitutional Chamber to rule on a sound interpretation to the principle covered in Article 301 of the Constitution (a novel provision under the current Constitution) as to matters covered in both DTCs and CPPIs.
The interpretation by the claimants in terms of the process of formation of the DTC VZLA-USA and its alleged unconstitutionality does not conform to the constitutional framework governing the matter, namely the 1961 Constitution and the current Bolivarian Constitution, which do not identify or precisely define the elements characterizing the process of framing international conventions under the terms indicated by the claimants. In fact, we consider that the interesting, yet inapplicable, introduction of categories established by renown Public International Law authors does not conform to the formal aspect of the subject of the controversy, which is none other than the characterization of and identification of the consequences of the so-called "understandings" contained in the exchanged notes and in the ratification instruments under the current Constitution.
The aforementioned understandings conform entirely to the legislative approval of the DTC VZLA-USA and that do not, by any means, signify the intention of the parties to renegotiate the convention, nor they involve a modification that would require approval from the National Assembly upon the terms of the current Constitution, inasmuch as the provisions of both the Convention and its Memorandum of Ratification are congruent with the provisions of Article 128 of the 1961 Constitution and Articles 154 and 187 of the Bolivarian Constitution.
Articles 8, 10, 11 and 12 and Article 26 are also duly constitutional, as are the remaining Articles of the DTC VZLA-USA, inasmuch as their essence is not to discriminate or establish a different tax treatment, or system for distribution of the tax power between one "Contracting State" and the other, i.e., there is no definition in the treaty that would require Venezuela to make a tax sacrifice that the United States of America would not have to make, in the same scenario. In fact, the reference made by the claimants that there is a difference in treatment of foreigners vis-à-vis nationals is completely contrary to the terms and purpose of the DTC, where the characterization as tax resident of a "Contracting State" receiving income from the other "Contracting State" is paramount in applying the DTC benefits.
In this sense, the mechanics of each DTC consists in that the tax powers of a party are limited in various categories of income and, in exchange, the other party undertakes to grant a credit for taxes paid in the first country, which can hardly be considered a case of discrimination against Venezuelan nationals under the terms of Articles 301 and 316 of the current Constitution.
Furthermore, to attempt to apply Article 301 of the Constitution, referring to "investments", by extension to situations such as those indicated in Articles 10, 11 and 12 of the DTC, claiming that "foreign investments shall not pay taxes in Venezuela" constitutes a misinterpretation and misapplication of the Convention.
In fact, the reading of said Articles necessarily shows the need for the beneficiary to be a resident of one Contracting State (say USA) for the treaty benefits to apply, which linked with Article 5 of the DTC VZLA-USA, results in that such provisions as to distribution of taxing powers are to be applied solely if there is no permanent establishment ("p.e."), since when such a beneficiary has a permanent establishment (say in Venezuela) to which such income may be attributed, such income would be fully taxable in said jurisdiction.
The mechanisms used to make cross-border investments, as defined in the Andean Pact provisions and the Investment Promotion and Protection Law, necessarily result in the existence of an investment vehicle (which may be a branch of a company or other corporate vehicle allowed under Venezuelan commercial law These are, among a great number of additional arguments, the aspects we consider most worthy of mention in terms of defending the DTC VZLA-USA, which, as mentioned above, is actually the defense of the basic set of DTCs subscribed and currently effective in the country. Though the effects of the decision, from a constitutional viewpoint, would not automatically extend reaching other DTCs, if the grounds of the claim made were upheld, such nullity could be requested and granted at any time by the highest court of our land, inasmuch as the wording of similar provisions of the remaining treaties that currently constitute the Venezuelan treaty network, including the one recently signed with the People’s Republic of China, is identical to those being questioned in the DTC VZLA-USA (this is necessarily so, as they derive from one of the two models used in this area, namely the model convention prepared by the Committee on Fiscal Affairs of the OECD (Organization for Economic Cooperation and Development) and the model convention prepared by the Economic and Social Council (ECOSOC) of the United Nations Organization, which do not vary in structure). Evidently, an scenario such as the one in reference would generate a situation of severe uncertainty in terms of the planning and framing necessary, not only to maintain the foreign investments existing in our country, but also to guarantee that new investments be made. It should be clear that the main purposes sought by treaties for the avoidance of double taxation and of investment promotion and protection conventions are not to receive fiscal incentives but rather to generate an scenario of certainty and stability. The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.