International Tax in Venezuela

The "agency PE" in international taxation at Venezuela.

As happens with regard to the basic rule PE and other PE rules under article 5 of the OECD model, there is little authority dealing with the way the agency PE rule must be interpreted.

Tax treaty practice in Venezuela regarding the agency PE has evolved from the initial tax treaties copying the 1963 OECD model (article 5, paragraph 4), and then the OECD model as amended from 1977 onwards (article 5, paragraph 4) for the agency PE rule, to the use of a variation of the agency PE rule under article 5 paragraph 5.
When it comes to the agency PE, Venezuela has not only copied in its latest tax treaties negotiated article 5 paragraph 5(b) of the UN model but it has included an additional paragraph under which there is an agency PE if the agent or representative habitually handles or secures customer requests - purchases - wholly or almost wholly on behalf of the enterprise (this would be the case with the tax treaties with Indonesia and Norway).

Furthermore, when it comes to identifying an independent agent, most recent treaties use a variation of article 5, paragraph 7 of the UN model, under which "when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise" the agent will not be considered an agent of independent status (that is the case for 12 of the tax treaties in place). However, only two of the Venezuelan tax treaties containing this type of deeming provision adopt the conditioning rule that the conditions made or imposed between the enterprise and the agent in their commercial and financial relations differ from those which would have been made between independent parties.

Under this framework, there is a single ruling referring to the agency PE, and only in an incidental manner. The guidance is contained in advisory letter ruling no. DCR-S-35773-6545 dated 20 August 2007 dealing with services rendered to a third party under an EPC contract structure by means of which a Chinese corporation rendered part of the services from overseas (including engineering and procurement) and its affiliate in Venezuela carried out the services in Venezuela (local procurement and construction). SENIAT, in applying the tax treaty with China, singled out the possibility that in an EPC contract a PE arises "where a person acts on behalf of an enterprise and has and habitually exercises in a Contracting State (Venezuela for the case at hand) an authority to accept [conclude] contracts in the name of the non-domiciled enterprise ... provided the same is not a broker, general commission agent or any other agent of an independent status ..."

Nevertheless, the ruling did not expand in interpreting for the particular case - the tax authority simply indicated that it did not know the facts well enough to identify whether there was a PE - the basis for considering whether the agent was an independent agent in light of the rule covered in the tax treaty with China, according to which "the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise".

In any case, while at first glance the reference may not seem to add much to the wording under the treaty, it may be relevant if taken against the backdrop of the domestic tax law definition of PE.

Article 7 of the Venezuelan Income Tax Law (VITL) conveys a very broad agency PE rule under which characterization is not conditional to the authority of the agent - person - to involve the enterprise in business activities in Venezuela, nor does it require that there is an authority to conclude contracts in the name of the enterprise or that the authority is exercised habitually; furthermore, the independent agent exception under article 7 VITL does not apply to otherwise independent agents, such as a broker or general commission agent, who have the power to conclude contracts in the name of the principal.

The provision seems to confuse the independent nature of the agency with the ability to conclude contracts in the name of the principal. This confusion may be the result of consistent case law in commercial and tax matters dealing with agency agreements where a line has been drawn between a disclosed agency - where the agent performs in the name and on behalf of the principal - and non-disclosed agency or commissionaire arrangements - where the agent performs in its own name but on behalf of its principal.

This confusion may translate into the interpretation of the tax treaty expression "agent of an independent status" as per domestic tax and commercial law statutory provisions as they have been interpreted so far, under which when there is legal independence of the agent, i.e. it is a broker or a commissionaire acting on behalf of the enterprise but not in its name, then it will be considered independent.
In this sense, practice has evidenced that a commissionaire agent or broker are commonly considered to perform as independent agents from a commercial stance and hence from a tax viewpoint, and there is no evidence that economic and legal factors referred to in the OECD model commentaries are followed in identifying the independent status of an agent.

In any case, as referred to earlier in this report, SENIAT has relied from time to time on the OECD model commentaries and therefore it would not be unimaginable that sooner rather than later it may attempt to apply some of the economic and legal factors covered in the commentaries to identify an independent agent status. In this scenario, a discussion is likely to take place as to the application of article 3(2) of the corresponding tax treaty.