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Cablegate: Politics and Taxes

VZCZCXRO8666
RR RUEHAO RUEHCD RUEHGA RUEHGD RUEHGR RUEHHA RUEHHO RUEHMC RUEHNG
RUEHNL RUEHQU RUEHRD RUEHRG RUEHRS RUEHTM RUEHVC
DE RUEHCV #1449/01 2012057
ZNR UUUUU ZZH
R 202057Z JUL 07
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 9325
INFO RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RHEHNSC/NSC WASHDC
RUCPDOC/DEPT OF COMMERCE
RUEATRS/DEPT OF TREASURY
RUMIAAA/HQ USSOUTHCOM MIAMI FL

UNCLAS SECTION 01 OF 03 CARACAS 001449

SIPDIS

SENSITIVE
SIPDIS

TREASURY FOR KLINGENSMITH, NGRANT, AND MMALLOY
COMMERCE FOR 4431/MAC/WH/MCAMERON
NSC FOR JCARDENAS
HQ SOUTHCOM ALSO FOR POLAD

E.O. 12958: N/A
TAGS: ECON EFIN VE
SUBJECT: POLITICS AND TAXES

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SUMMARY
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1. (SBU) The BRV's tax authority, SENIAT is taking the lead
role in going after many of Chavez' political and economic
opponents while at the same time taking positive steps to cut
down on tax evasion and improve the government's tax base.
The SENIAT Superintendent, Jose Vielma Mora has become more
politically active in recent months, and SENIAT often acts as
the government's storm troopers targeting specific sectors to
provide legitimacy to Chavez' claims of negligence or
intransigence. The government's worsening fiscal situation
driven by stagnating or decreasing oil revenues and
increasing costs has made SENIAT's role more essential.
Recent results paint a rosy picture of government tax
receipts, but belie underlying causes for concern.

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AUDITS OF CONVENIENCE
---------------------

2. (SBU) During the second week of January 2007 Chavez
announced that the BRV would nationalize the Avila Magica
cable car system in Caracas that takes visitors to the top of
the Avila mountain. The cable car system was run by a
private Venezuelan consortium and was in the sixth year of
its thirty year concession. The consortium had restored the
previously defunct system and invested large sums in its
maintenance On May 2, the creation of a commission to
inspect and control the cable car concession was announced in
the BRV's Official Gazette. On July 12 the National Assembly
passed a law transferring the cable car systems in Merida and
Caracas to the BRV's tourism company. Concurrent with the
announcement, SENIAT announced that Avila Magica was
delinquent in its taxes, an announcement that was used by BRV
officials to defend that expropriation.

3. (SBU) On February 14, Chavez threatened to nationalize the
country's supermarkets and food distributors for contributing
to the shortages and inflation. SENIAT closed the
supermarket chains Unicasa and Central Madeirense on April 13
for 48 hours for accounting irregularities. SENIAT and
consumer "protection" agency INDECU routinely close
individual stores for selling items above regulated prices.

4. (SBU) RCTV officials have described a variety of BRV
harassment against the station, including almost daily visits
from SENIAT tax inspectors looking for irregularities in
their books. RCTV has been the subject of numerous fines by
SENIAT, INDECU, and other BRV agencies and most recently,
SENIAT charged RCTV a fine of Bs. 1.7 billion for back taxes
on July 3 (adding insult to injury over a month after it was
closed by the BRV, and less than a week after it had
announced plans to return to Venezuelan homes via DirecTV and
cable).

5. (SBU) On April 2, 2007 Chavez threatened to nationalize
the nation's health care sector (Venezuela currently has a
hybrid public/private system), noting that "if the private
clinics, for example, continue speculating, increasing
prices, we will have to regulate them...if the private
clinics don't comply with the regulations...well we will have
to nationalize them." The cost of health care is one of the
fastest growing components of the inflation index, which BRV
officials attribute to speculation and price gouging. Sector
contacts explain the increase in prices as a natural result
of a decreasing supply of doctors lost to brain drain and
materials unavailable due to currency control restrictions
coupled with increased demand as more Venezuelans can afford
to move from the public to private system.

6. (SBU) On April 16 SENIAT deployed 8,000 tax inspectors to
audit all of the private clinics in the country and announced
a new 1-800 phone number for citizens to denounce excessive
medical costs. On April 22 Vielma Mora announced that they
had fined 179 private clinics and closed an additional 123
for evading taxes. Since April, Chavez, Vielma Mora, the
Ministry of Health, and other state actors have continued to
denounce the private health care system, and as recently as
July 17 SENIAT announced another sector-wide audit.

7. (SBU) The BRV's slow takeover and nationalization of the

CARACAS 00001449 002 OF 003


petroleum industry during the past two years has been
accompanied by SENIAT's tax inspectors. During the past
year, post has tracked the following fines and back taxes
claimed by SENIAT on the international oil companies (IOCs)
operating in the Faja belt: USD 200 million combined from the
faja belt companies in July 2007, Chevron USD 43.13 million
on May 15, Petrozuata USD 465 million on May 11, 2007, Exxon
Mobil USD 3.8 million on May 4, 2007, Cerro Negro closed for
48 hours on March 8, 2007, Petrozuata USD 98.1 million on
December 14, 2007, Sincor USD 880,000 on December 7, 2006,
Texaco Orinoco Resources USD 4 million on November 14, 2007,
Phillips Petroleum Co. USD 7.2 million on November 14, 2007,
Chevron USD 19.4 million on September 21, 2006, British
Petroleum USD 37.2 million on September 21, 2006.

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A SOCIALIST TAX, BUT NOT A TAX ON SOCIALISTS
--------------------------------------------

8. (SBU) SENIAT is currently drafting a new "socialist" tax
code, which is expected to be released in August. Planned
revisions to the current tax code include an increase on sin
and luxury goods, including cigarettes and alcohol, a change
in the calculation of income tax, and the creation of a
capital tax, which would tax a percentage of individuals' net
worth exceeding USD 465,000 (not including their principal
residence). This capital tax would supposedly tax total net
worth, including assets held abroad. How SENIAT intends to
enforce this concept remains difficult to foresee. Econ
section contacts already admit to moving assets into
children's' and family member's names to reduce the amount of
property they "own."

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A SOCIALIST BUSINESSMAN?
------------------------

9. (SBU) Vielma Mora participated in the May 9 inauguration
of the National Confederation of Socialist Businessmen (CESV)
in Caracas. The event was covered by the major daily papers,
most of which included a photograph of the group with the tax
authority superintendent front and center. The group,
destined to compete with the country's Chamber of Commerce
FEDECAMARAS is small and fairly inactive, though could
potentially be seen by the BRV as a replacement to the
"oligarchic coupsters" at FEDECAMARAS. (COMMENT: With the
tax authority on board (literally as a member of its board of
directors), the confederation also benefits from its
appearance as a protection racket from BRV intervention. END
COMMENT.)

-----------------
SHOW ME THE MONEY
-----------------

10. (SBU) Roughly half of the BRV's funding comes from oil
revenues and half from tax revenue. SENIAT has succeeded
admirably in recent years in cutting down on tax evasion (a
competitive sport in Venezuela) and in increasing the
government's take from 2.3 percent of GDP in 1999 to 12.4
percent of GDP in 2006. SENIAT also routinely exceeds its
quotas (an effect both of lowballing estimates and profiting
(in nominal terms) from inflation and economic growth, which
is raising incomes, consumption, and the taxes associated
with these activities). Revenues grew 44 percent in the
first half of 2007 versus the same period in 2006 and SENIAT
has already met 60 percent of its 2007 goal, even as spending
and revenue growth tend to accelerate during the second half
of the year.

11. (SBU) Recently, however, the government has become more
dependent on oil income to fund itself. A recent Citibank
report accurately notes that oil tax revenues for the first
half of 2007 grew to 19 percent of total tax returns, from 12
percent in 2006. At the same time, income from the value
added tax (IVA) is dropping due to the BRV decision to lower
the rate in an attempt to fight inflation from 14 percent to
11 percent in March and 9 percent in July. Should oil prices
or production fall and/or economic growth falter, SENIAT may
be hard pressed to make up the difference.

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COMMENT

CARACAS 00001449 003 OF 003


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12. (SBU) Vielma Mora, a retired Navy captain and participant
in the 1992 coup, clearly knows where his bread is buttered.
A two-story billboard at the entrance to Maiquetia airport's
cargo terminal features Chavez and Vielma Mora promoting
SENIAT's new customs house. Vielma Mora can frequently be
seen at Chavez events, such as his weekly "Alo Presidente"
television program. As SENIAT's activities become more
politicized, it risks undoing much of the praise it has
earned locally and abroad for combating evasion and improving
Venezuela's tax base. It may also call into question the
disposition of foreign institutions to work with SENIAT in
transnational matters such as money laundering and IPR
protection. Virtually any financial transaction today in
Venezuela requires the purchaser to give the seller his/her
national identity number, name, address, and phone number for
submission to the tax authority. While the value of this
data is questionable (and the BRV's ability to store and mine
it even more questionable), contacts happily admit to
submitting the number 1-2-3-4-5-6-7-8-9 when asked for their
identification.

FRENCH

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