US embassy cable - 04CARACAS3015

C O N F I D E N T I A L  CARACAS 003015 
 
SIPDIS 
 
 
STATE FOR WHA/AND 
NSC FOR CBARTON 
TREASURY FOR OASIA-GIANLUCA SIGNORELLI 
HQ USSOUTHCOM FOR POLAD 
 
E.O. 12958: DECL: 09/20/2014 
TAGS: ECON, EFIN, PGOV, VE 
SUBJECT: TAX COLLECTION PLAN: A SERIOUS EFFORT OR 
HARASSMENT? 
 
REF: CARACAS 2365 
 
Classified By: ECONOMIC COUNSELOR RICHARD M. SANDERS FOR REASON 1.4 B A 
ND D 
 
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SUMMARY 
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1. (SBU) The head of the Venezuelan tax authority (SENIAT) 
announced on September 7 that the GOV's goal for 2005 tax 
collections (including taxes on oil revenues) would be 56% 
higher than the 2004 goal.  This comes at a time when tax 
collection methods, particularly a program called "Plan Zero 
Evasion," have come increasingly under fire from the private 
sector.  There are no indications that the Plan has uncovered 
any actual tax evasion, but has generated limited revenue 
through fines.  The fines are often accompanied by temporary 
business closures, which the business sector argues are a 
violation of due process, but SENIAT officials assert 
(without providing specifics) that the Plan is a rousing 
success.  The raids underscore the business community's 
vulnerability to heavy-handed government interference.  END 
SUMMARY. 
 
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THE PLAN - ZERO TAX EVASION 
--------------------------- 
 
2. (C) In May 2003, the GOV introduced a program to increase 
tax collections, called "Plan Zero Evasion."  Jorge Molina, 
the Chief of SENIAT's "fiscalizacion" (on-site audit) 
division, told econoff on September 15 that Plan Zero Evasion 
had two main objectives.  The first was to create what he 
termed "subjective risk," i.e., to put people "on alert" and 
create the impression that payment was absolutely expected, 
something he said has never been the case in Venezuela.  The 
second objective was three-fold: to inform the public about 
expectations and the law, to verify fulfillment of formal 
record-keeping obligations, and to perform complete audits 
when necessary. 
 
3. (C) To carry out the plan, SENIAT auditors, accompanied by 
National Guard troops, visit several businesses of the same 
type throughout the country simultaneously.  The decision as 
to what type of business will be audited next is made outside 
of the audit division, which Molina did not clarify further. 
(Comment: We would bet that SENIAT head Jose Vielma Mora 
makes these decisions himself, perhaps following 
consultations with higher political levels in the GOV.  End 
comment.)  He stated that an audit could be organized in as 
little as two days.  SENIAT launched a new tactic the second 
weekend of September, when students were sent into local 
malls armed with the authority to assess fines of up to USD 
64.32 to customers who left stores without a legal receipt. 
Molina said that "many" fines were assessed. 
 
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THE METHOD - THE STORY OF AN AUDIT 
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4. (C) Ronald Evans, a tax attorney at the Caracas office of 
leading U.S.-based international law firm Baker & McKenzie 
(and also the President of the Venezuelan Financial Law 
Association and a member of the VENAMCHAM tax committee), 
told econoff on September 10 about the audit of his firm by 
SENIAT, which began in May 2004.  SENIAT auditors appeared 
unannounced with six National Guardsmen, along with cameras 
from the state television station.  They brought personal 
computers, expecting to download all data from the firm's 
computers.  After protest that this would violate client 
confidentiality, a compromise was reached, that four 
 
SIPDIS 
attorneys would preside over a file-by-file review to 
determine which contained the firm's own tax information.  A 
complete one-day computer shutdown was required to accomplish 
this, during which the firm had to rent hotel space to 
continue basic operations.  After the review, SENIAT assessed 
a fine of USD 7800, not for tax evasion, but rather for 
failure to properly fulfill all formal tax accounting 
requirements.  A 48-hour closure was mandated, along with 
another one-day computer shutdown.  Employees were allowed to 
 
 
work, but all public contact was prohibited.  The computer 
shutdown fell on the day when Baker & McKenzie was to perform 
its end of fiscal year accounting.  It requested a one-day 
postponement, which was denied because the closure was 
already "programmed." 
 
--------------------------------------------- ------------- 
THE RESULTS - LOTS OF BUSINESSES CLOSED, VERY LITTLE MONEY 
--------------------------------------------- ------------- 
 
5. (C) SENIAT's Molina stated that about 3300 businesses had 
been audited under the Plan in 2004, and that about 70% of 
those visited in the greater Caracas area had been closed 
(from one to three days), but only about 50% nationally.  He 
said that the closures were - as in the case of Baker & 
McKenzie - for failure to fulfill formal requirements rather 
than tax evasion, and that the main problem was not having 
the complete accounting ledgers on site as required.  He 
indicated that personal knowledge of the business/owner by 
the auditors was sometimes a factor in a decision not to 
close a business, which he used to explain why the closure 
rate was lower outside of Caracas.  Molina estimated that 
2004 collections from the Plan were in the range of USD 1.9 
million, which is less than .03% of total SENIAT collections 
for the year.  (NOTE: statistics from the Venezuelan-American 
Chamber of Commerce - VENAMCHAM - state that 66% of audited 
businesses have been temporarily closed as a result of the 
Plan, and that the total of fees collected since the Plan 
began was USD 1.7 million.) 
 
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THE COMPLAINTS - ILLEGAL AND EXCESSIVE 
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6. (C) Based on his contacts with other businesses, Evans 
said that the circumstances of Baker & McKenzie's audit were 
fairly representative.  However, it is the only law firm (and 
as far as he knows, the only business) that has protested the 
closure and fine in court.  It argued that the closure 
violates its right to due process, that it is 
disproportionate to the alleged offenses, and that it 
violates the constitutional principle of efficient tax 
collection.  Evans says other companies agree with those 
charges, but seem to consider the fines not worth the trouble 
to fight, or prefer to keep things as quiet as possible.  He 
has spoken publicly about the audit issue, once commenting on 
the SENIAT audit of bakeries, pointing out that they were 
already struggling to make a profit because of the price 
controls on bread products.  Vielma Mora sent Evans an email 
which, though not overt, Evans considered threatening.  He 
showed econoff the email, where Vielma declares "there is a 
gigantic breach of evasion" by bakeries - before any audits 
were completed.  VENAMCHAM Executive Vice President Antonio 
Herrera, in a letter dated July 6 that he provided to post, 
complained to Vielma Mora that SENIAT's actions had created 
an impression of unequal treatment, harmed the rule of law, 
and discouraged investment. 
 
7. (C) The GOV has responded to some of these complaints. 
According to VENAMCHAM Finance Committee staffer Maria 
Angelina Velasquez, Vielma Mora, in an August 4 meeting with 
the VENAMCHAM tax and foreign trade committees, promised to 
"tone down" its audits by no longer bringing camera crews and 
possibly reducing the number of National Guard troops who 
accompany the auditors.  Molina, however, told econoff that 
there were no plans to stop audits with troops, as some that 
had taken place without any such protection resulted in 
"cacerolazos" (pot-banging protests) and physical abuse, as 
in one incident in which a woman (not from the business being 
audited) kicked him.  Molina also disputed the charges of 
illegality and inefficiency, claiming that the process was 
completely justified in the tax code, and was much more 
efficient and effective than ever. 
 
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COMMENT 
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8. (C) The stated purpose of Plan Zero Evasion is laudable - 
to reduce tax evasion in a country where such behavior is 
rampant.  However, the fact that the audits continue without 
 
 
change when SENIAT is not discovering evasion and generating 
minimal revenue suggests that the purpose is different.  The 
raids underscore to the business community its vulnerability 
to GOV harassment and the importance of staying in its good 
graces.  Targeting multinational and prominent local firms 
also helps bolster the GOV's image as a "revolutionary 
government" unafraid to take on vested interests.  The much 
ballyhooed Plan Zero Evasion also, of course, heightens the 
profile of Vielma Mora, a former military officer and 
participant in Chavez's failed 1992 coup. 
Brownfield 
 
 
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      2004CARACA03015 - CONFIDENTIAL