PLANNING IDEAS FOR MULTILATINAS | By Leopoldo J Martinez*

In the current context not only business become global, but families are global as well. This has become more frequent in Latin America. As a result, we find more closely held, family-controlled business, exposed to the need of sophisticated international tax and estate planning. On the other hand, the recent positive economic trend in Latin America has originated the emergence of the multinational Latin American companies (or Multilatinas), which more often than usual in other environments, are closely held rather than publicly traded corporations.

The main issues are not only to achieve tax efficiency for the company, but looking into structures efficient from the shareholders perspective as well; and in doing the same, protect assets from multijurisdictional estate taxation issues, while creating a reliable holding or control structure, which includes, avoiding black listed jurisdictions that normally present not only tax issues but also financial compliance challenges.

Considering this background, there are two important tools or vehicles for planning. The “Fundacion de Interes Privado” or Private Interest Foundation (PIF) in Panama, and the Barbados International Business Holding Company (Barbados IBC or IBC).

The Panama Private Interest Foundation: an alternative the Trust with legal efficiency in both common law and civil law jurisdictions.

The PIF was introduced by Panama Law 25 of 6/12/1995. It works the same as a German or Liechtenstein “Stiftung”, but in the heart of Latin America. With PIF a family can set aside certain business assets or other property at an independent legal structure, with the sole purpose of protecting such assets and establish specific dispositions favoring beneficiaries upon the death of the organizers or any other events. Although the PIF is not a commercial vehicle or holding company, it might be expected to receive dividends or other passive income from its endowment assets. In such event, for non-Panama beneficiaries or for income from sources without Panama, there are fantastic benefits derived from the Panamanian territorial income tax system. In addition, Law 25 specifically overrides inheritance laws of any other country, including those of Panama. The structure could achieve maximum international estate efficiency if the beneficiaries are other entities domiciled in Panama, or in any other jurisdiction without estate taxes as well, or if the assets to be transferred do not have “situs” in a jurisdiction presenting estate taxation issues for non-residents. On the other hand, Panama continues its crusade to be excluded from the OECD blacklist by entering tax treaties with countries, which are member to such organization.

Finally the PIF assets or endowment is not subject to legal actions (i.e. attachments or other measures) from related entities or the organizers, and most importantly, the legal entity is normally characterized both as a “Trust” from the USA tax law perspective; and as an independent and autonomous legal entity, from a non common law jurisdiction perspective. This dual or hybrid characterization resolves the many issues presented by trusts in the Latin American context, where such arrangements are not recognized and pose several questions for a tax perspective, more specifically when assets are held by non-financial institutions or private trustees or not recognized as “Fideicomisos” under local law.

Confidentiality is a relevant feature of the PIF, as panama law permits the organization of the Foundation with a Basic publicly registered deed, deferring relevant provisions to a privately executed deed or “Reglamento”.

Treaty networking with Barbados International Business Companies

The Barbados IBC presents a significant set of advantages.  Barbados is not a blacklisted jurisdiction, although it presents low taxation for the IBC. Barbados has important Tax Treaties network, as shown below. Therefore, the jurisdiction presents an excellent choice for the tax planning of global business ventures or businesses held by global families, as it has every measure necessary to manage the holdings: efficient or low income taxes, no estate tax, and every measure to prevent double taxation with major jurisdictions, including the following tax treaties:

TAX TRETIES TO AVOID DOBLE TAXATION IN FORCE IN BARABADOS Country Date of Signature The United Kingdom March 26, 1970 Canada January 22, 1980 USA December 31, 1984 1st Protocol US/B'dos DTA December 18, 1991 2nd Protocol US/B'dos DTA July 14, 2004 Finland June 15, 1989 Norway November 15, 1990 Sweden July 01, 1991 Switzerland Agreement extended to Barbados by virtue of Agreement between Switzerland and the U.K., 1954 CARICOM July 06, 1994 Venezuela December 11, 1998 Cuba June 17, 1999 China May 15, 2000 1st China/B'dos Protocol February 10, 2010 Malta December 5, 2001 Mauritius September 28, 2004 Botswana February 25, 2005 Austria February 27, 2006 Kingdom of the Netherlands November 28, 2006 Republic of Seychelles October 19, 2007 Republic of Mexico April 7th, 2008 Republic of Ghana* April 22, 2008 Luxembourg* December 1, 2009 The Republic of Panama* June 21, 2010

In addition, discussions between Barbadian and Japanese officials over the possibility of a tax agreement took place in August 2006. Barbados has also advanced treaty negotiations with Italy, Spain and Vietnam. Discussions are continuing towards finalization of similar conventions with other nations, including Belgium, Brazil, Chile, Czech Republic, Iceland and India.

One relevant consideration for this article relates to the fact of the Treaty with Panama, which places the use of a Barbados IBC, controlled by a PIF in optimal tax efficiency. Also, when looking downstream in the potential holdings of the IBC, treaty networking could be achieved with most relevant European jurisdictions, as well as the United States or Mexico, nations where most Latin American global families or global business, including “Multilatinas”, have significant operations or exposure. The list also includes countries where asset protection strategies are critical, such as Venezuela, with whom the Government of Barbados has a Treaty for the Reciprocal Protection of Investments as well. The prospects of treaties with Brazil and Chile are promising for organizing regional business operations, and in the case of Brazil, it offers an efficient option that escapes the negative implications of domicile at blacklisted jurisdictions according to Brazilian income tax laws and transfer pricing regulations. Finally as a member for the CARICOM (the Caribbean free trade initiative), the Barbados IBC might offer an excellent platform for tax and trade treaty networking in the Caribbean.

Under Barbados law an IBC is a company that carries on the business of international manufacturing or international trade and commerce from within Barbados. International manufacturing is the business of making, processing, preparing or packaging within Barbados, any product that is exclusively for export. International trade and commerce includes any of the following activities, that is to say:

a. The business of being a broker, agent, dealer, seller, buyer or factor within Barbados of goods existing outside Barbados or of goods to be trans-shipped through or from Barbados.

b.             The business of the selling of services which, if originating in Barbados, are to or for, or on account of, persons resident outside Barbados.

A company will be granted an IBC License if:

a. It is resident in Barbados; and

b. It satisfies the Minister of International Business (by furnishing the requisite information) that it is financially capable of carrying on the business of international manufacturing or international trade and commerce.

Tax Regime of the Barbados IBC

IBC's are subject to tax on all profits and gains based on the following scale:

2.5% on the first US$5,000,000.00;

2% on the next US$5,000,000.00;

1.5% on the next US$5,000,000.00; and

1% on the excess above US$15,000,000.00

No income tax is payable on dividends, royalties, interest, fees or management fees paid or deemed to be paid by an IBC to a company carrying on an international business or to a person resident outside Barbados.

An IBC is not obliged to withhold any portion of the dividends, royalties, interest, fees or management fees or other income paid or deemed to be paid by to a company carrying on an international business or to a person resident outside Barbados.

No tax, duty or other impost is leviable on an IBC, its shareholders or transferees in respect of any transfer of any securities or assets, other than a transfer of taxable assets, to another IBC or to a person resident outside Barbados.

Taxable assets are real estate situated in Barbados and held by or on the behalf of an IBC; as well as office equipment, supplies, furnishings and fixtures, machinery, vehicles and equipment used in Barbados in carrying on the business and affairs of the IBC.

An IBC may import free of customs duty, consumption tax, ad valorem stamp duty and other like duties, taxes and imposts, such plant, machinery, equipment, fixtures, appliances, apparatus, tools and spare parts, and such raw materials, goods, components and articles, as is necessary for the company to carry on its international business.

Where an IBC requires the services of specially qualified individuals in order to carry out its business effectively from within Barbados and

(a)           it is unable to acquire those services from within the CARICOM Region; and

(b)           it is unable to retain those services from outside Barbados without special tax concessions;

The Minister of Finance may authorise that a prescribed percentage of the salary of the specially qualified person (who is not a resident of a CARICOM country):

(a)           be exempt from income or other tax in Barbados,

(b)           be paid in a foreign currency in a trust account without being liable to income tax in Barbados as to the amount paid or any interest earned thereon, or

(c)            be paid in some other prescribed manner in another currency or otherwise without being liable to income tax in Barbados.

No person shall disclose any information relating to any application of a prospective IBC or to the affairs of an IBC, other than so far as such information forms part of the public record kept by the Registrar of Corporate Affairs, except when authorised by the prospective IBC or the IBC to do so, or when lawfully required to do so by order of a court of competent jurisdiction.  There are no currency exchange control restrictions in respect of the international business carried on by an IBC. An IBC must file annual audited financial statements with the Minister of Finance, and the annual renewal of the IBC Licence is contingent upon the said filing. You will therefore need to appoint local auditors for this purpose.

Conclusion

Global Latin American closely held businesses, Multilatinas' shareholders or Global Latin American Families can benefit from efficient income and estate tax planning strategies by structuring a holding IBC in Barbados, controlled by a PIF in Panama.

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* Leopoldo J Martinez is the Managing Partner of LMN CONSULTING LLC, an international strategic and tax planning specializing in the Latin American market place, with affiliates in Washington DC, Dallas, Miami, Mexico, Panama and Caracas.

PANAMA TAX TREATY DEVELOPMENTS AND NEW POLICIES: THE IMPLICATIONS By Leopoldo J. Martinez.[i]

Panama is rapidly changing its tax policies without loosing its attractiveness.

For several years Panamá has been characterized as a “tax heaven”, thus, blacklisted by many jurisdictions for tax purposes, including the OECD countries. Being a blacklisted jurisdiction pays a price that sometimes out weights the benefits provided by low or none income taxes in such jurisdiction. Many Latin American countries increase income tax withholding rates on payments to blacklisted jurisdictions and impose stringent reporting requirements that include treatment of the entity as a local taxpayer. Outbound tax regulations in the US and other OECD countries do have some negative implications for “blacklisted jurisdictions” in different ways. Finally; the OECD list is used as a reference for many other compliance matters in the financial regulations terrain; and as such, an obstacle to long lasting development policies fostering foreign investment and free trade. In fact, interesting opportunities with the European Union, Chile and the United States have pushed Panama to move out of the “darkness” of being listed as a “tax haven” to enter into free trade and investments agreements. Panamá, a country with a growing population and economic potential, has the ambition of embracing international transparency, promoting policies that will make economic growth sustainable and diverse, yet not giving up its attractiveness for foreign investors, both in the real economy or the financial sector. Consequently, Panama’s new policy has moved to negotiate and execute international tax treaties, while preserving a tax system that raises domestic revenue without loosing international competitiveness, therefore, offering incentives to new projects attracted by its strategic geographical location to serve as a platform to reach into the emerging developing Latin America economy, without becoming a typical “tax haven”.

The government of Panama has introduced a number of changes in tax policy and legislation. One very important development relates to the signing of Tax Treaties with OECD countries. Tax Treaties to prevent double taxation also bring transparency to the table as tax information, transfer pricing requirements come together with measures to relief international taxpayers from the tax implications of doing cross-border business or engaging in international, multijurisdictional operations or investments. In the intergovernmental relation, tax treaties offer enhanced exchange of information to fight against tax evasion, as well as rules to resolve sourcing of income or transfer pricing issues through competent authority procedures if necessary. Treaties have been signed by Panama with Mexico and Spain; concluded negotiations with Barbados, Italy, France, Belgium, The Netherlands, and advancing negotiations with Luxembourg, Singapore, Ireland, Check Republic and Korea. The government expects to have 12 treaties in force by September and October this year. With such target, Panamá could be removed from the OECD low tax jurisdictions list, gaining status and recognition for international transparency and commitment to prevent tax evasion, but at the same time, granting investors and businesses relief from double taxation. The model OECD treaty has been the central piece or point of departure for all negotiations.

However, Panama domestic income tax system remains highly competitive and offers interesting incentives. The maximum nominal income tax rate applicable is 30%. However, capital gains are taxed at lower flat rates of 10 % for real property and 5% for personal property and securities.^[1] Distributions made by the SA and SRL to its shareholders are also taxable. A 10% withholding tax would be imposed upon the distribution of dividends by the SRL to the stockholders.^[2] Under Panamá Law dividends must be paid out of earnings and profits received and liquidated. Return capital and other non-divided distributions could result from redemptions and liquidation. However, all distributions will be subject to the 10% withholding tax. Retained earning will be subject to a “retained earnings tax” or minimum dividend tax of 10% of 40% of the after tax income. There is an Alternative Minimum Tax of 1.401% of the gross taxable income creditable towards income taxes (thus, the company pays the higher of 30% of net income or 1.4% of gross). Nonetheless, the Panamá income tax system only taxes territorial income, therefore, all income not sourced to Panama under the sourcing rules will escape taxation in Panamá.  Re-invoicing is considered non-territorial income, which includes sales done from Panama of goods that did not enter Panama territory. Accordingly, outbound or extraterritorial income could pass-through a panama entity without major implications in Panama, including for dividend distributions.

On the other hand, Panamá had introduced the “Colon Free Trade Zone” and “Export Processing Zones”, among other tax incentives to trade and investment.. Tax laws provide under this two regimes a set of incentives to export and re-export operations under the Colon Free Trade Zone and the Special Regime applicable to Export Processing Zones.

Located near the northern entrance of the Panama Canal, the Colon Free Zone (CFZ) offers free movement of goods and full exemption from taxation on imports and exports. The CFZ is a major factor in facilitating the supply of goods from large industrialized countries to the consumer markets in Latin America. Firms located in the CFZ are exempt from import duties as well as from guarantees, licensing and other requirements and limitations on imports. There are no taxes on the export of capital or the payment of dividends. Companies operating in the Free Zone must separate their accounting systems for their external operations from their internal operations. External operations are defined as the re-export of merchandise from CFZ warehouses and are exempt from income tax. Internal operations are those in which sales are made from CFZ warehouses to customers located within the customs territory of Panama, including those made to ships and airplanes using canal facilities, and to passengers in transit. Profits arising from internal operations are not subject to any special treatment. In general, commercial or industrial enterprises are required to obtain a license to carry on their activities in Panamá. An annual business and industrial license tax is levied at the rate of 1% on the net worth of the company concerned, which is increased by amounts owed to any parent company or head office located abroad. This license tax may not exceed US$20,000. Companies engaged exclusively in off shore or CFZ are not required to have a license. Companies established in the Colon Free Trade Zone are exempt from the obligation of filing any type of tax return for income derived from “external operations”, which is the re-export of merchandise from Colon Free Trade Zone warehouses.

The Special Incentives for Export Processing Zones (EPZ) are provided pursuant to Law Nº25 of 1992, these are basically private free zones, that allow for import and re-export operations with total exemption from duties. Among the Enterprises that can participate in the EPZ are manufacturing enterprises; assembly enterprises (“maquilas”); finished or semi-elaborated products processing enterprises; services export enterprises; general services enterprises. The main tax incentives for an EPZ are:

• The enterprises, as well as its activities, are exempt from all local direct or indirect taxes, contributions, assessments, rights, and charges. Nevertheless, there is some discussion on whether income tax exemption will be granted to those foreign enterprises whose countries permit the deduction or crediting of taxes paid in Panamá.

• Duty free importation of machinery, equipment, raw materials, tools, accessories, lubricants, and all goods and services required for operation.

• Exemption from license tax.

Recently, the Panamanian government introduced some changes applicable to the Colon Free Trade Zone. Accordingly, a 5% withholding tax applies to dividends paid by enterprises in the Colon free trade Zone, but the companies continue to be free of taxation from extraterritorial operations (i.e. re-exportation operations), export or other categories of exempted income.

One interesting issue emerging from Panama’s crusade to become a treaty partner to OECD countries will be transfer pricing. Panama income tax law has no transfer pricing requirements or regulations. However, most of the model treaties upon which negotiations are based do require in their Article 9 that “Associated Enterprises” do comply with transfer pricing.

Finally, some of the Panama withholding taxes imposed on remittances, services or dividends could be reduced or eliminated by the tax treaties signed, particularly when there is no Permanent Establishment in Panama (i.e. Business, profits, Royalties) or dividends are paid to a fully owned subsidiary or one where the parent company controls more than 75% or 80%.

  

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[1] There is a 5% withholding tax on the gross income of the transaction, which is a final tax unless the gain tax results in a lower tax liability, recoverable through a credit or a refund process in the yearly tax filings of the entity.

[2] This withholding tax will increase to 20% if stock is issued to bearer.

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[i] Leopoldo J Martinez is the Managing Partner of LMN CONSULTING LLC, an international strategic and tax planning specializing in the Latin American market place, with affiliates in Dallas, Miami, Mexico, Panama and Caracas.

New Foreign Exchange Regulations enacted by the Central Bank of Venezuela

The Central Bank and Minister of Finance of Venezuela enacted the Exchange Agreement #18, giving authority to the Central Bank to issue Resolution #100601. 


The new foreign exchange regulations reestablished, after more than 2 weeks of suspension of the once known as "USD permuta market", an alternative for foreign exchange transactions outside of the tightly controlled CADIVI system. The new parallel fluctuating USD market (SITME) replaced the once known as "permuta market", and essentially re-opened the alternative of purchasing and selling USD denominated securities but now only through the banks. Pricing of the bonds should fluctuate within a band or range established by the Central Bank, according to international debt prices. The Central Bank will actively and closely intervene in the market and there is an e-platform for the transactions, giving the Central Bank sufficient indication of supply and demand, as well as the parties participating in each transaction. In practice, the exchange control has moved from a dual to a multiple exchange system, with two controlled pegged rates applicable to certain imports and transactions authorized by CADIVI at 2,60 or 4,40 Bs.F per 1 USD, and a fluctuating rate system administered by the Central Bank through the banks, based on this "E-bond" platform using international bond prices as a reference within a band for fluctuation fixed by the BCV. The Central Bank has issued regulations regarding the access to this market. Corporate acquisitions are limited to US$ 50,000 per day per company, and there is a US$ 300,000 per month per company or corporation. Individuals are subject to specific restrictions.


Foreign Exchange companies legally authorized will operate in the market solely for certain foreign currency exchange services such as travelers checks, small remittances, and other individual needs pursuant to the terms of the regulations.


The SITME system is managing total volumes ranging from US$ 30 million per day, with peaks in the range of US$ 50 million. The implicit exchange rate is averaging Bs.F 5,3 per USD and the band for prices of the USD denominated securities traded through SITME are published daily by the Central Bank at: www.bcv.org.ve

Colombia's Net Worth Tax

Colombia's Congress passed Law 1,370 (12/30/2009) enacting a Net Worth Tax. The new tax will be effective as of January 1, 2011 and apply to individuals, companies or "de facto companies" with a net worth equivalent or higher than COP$ 3,000,000,000 (approximately US$1,588,983), after certain applicable deductions.

Shares of Stock issued by local companies and up to $150,000 of the value of real property used as the principal home of the taxpayers are deducted or excluded from the tax. Taxpayers with a liquid net worth valued between COP$3,000,000,000 and COP$5,000,000,000 (approximately US$2,648,305) will pay a Net Worth Tax at a 2.4% rate. In the case of higher net worth, the rate is increased to 4.8%. The value of the Net Worth Tax cannot be used as a deduction for income tax purposes.

LatAm Consulting Update: Venezuela's New Foreign Exchange Law includes "Bond Swaps" as controlled transactions

The National Assembly approved the reform to the Foreign Exchange Control Laws today (5/13/2010).

As indicated in our previous alert, the "bond swap market" (also known as "US$ Permuta Market") has been defined as a "foreign exchange transaction". By placing the "US$ Permuta Market" under the Scope of the Law, it will be illegal to trade in securities denominated in US$ outside of the institutional trade to be organized, regulated and intervened by the Ministry of Finance and the Central Bank of Venezuela. It is expected that a "regulatory framework" for the trade with securities denominated in USD will be issued shortly by the Central Bank.

For details into the new law: http://www.asambleanacional.gob.ve/index.php?option=com_content&task=view&id=24801&Itemid=27 

In a press conference yesterday (5/18/2010), the head of the Central Bank and the Minister of Economic Planing addressed the nation indicating that the implementing regulations will be issued within the next week, indicating that there will be a parallel market or a market with USD denominated securities organized by the Central Bank, under a platform that will guarantee no speculative pricing and under the intervention and control of the authorities, permitting the value of the securities, and thus, the rate of exchange of the USD to fluctuate within a band or range. They further announced that "Stock Brokerage  Companies" (Casas de Bolsa y Sociedades de Corretaje) will be banned from participating in this market, indicating that investigations will follow to determine their potential responsibility for illegal speculation at the now banned "Permuta Market".

We will issue updates when the authorities and the Central Bank take the expected regulatory measures.

LatAm CONSULTING ALERT: NEW EXCHANGE CONTROL LAW IN VENEZUELA TO AFFECT USD FUNDING THROUGH THE "BOND SWAPS" (PERMUTA MARKET)

Background. For several years the Venezuelan exchange control system excluded from its scope all transactions with "securities" allowing a very dynamic market of "USD denominated Bonds" to be swapped for Bs.F denominated bonds, thereafter sold for USD in the international secondary markets (know as the USD "permuta market").

The USD "permuta market" offered a fluctuating alternative to access USD for those not eligible or not granted access to the pegged control rates through the CADIVI-Central Bank controlled system. After the devaluation and dual exchange system adopted early this year, President Chavez himself declared the war against the "price increases and speculative movements in the "USD permuta market". As the crisis has evolved, and the CADIVI-Central Bank system has proven to be more inefficent, the market had shifted drastically to the flexible USD "permuta market" as a source to fund their foreign exchange needs. The increased demand has driven the implcit rate of exchange in the "permuta market" to tirpple and double the official pegged rates provided by the "dual controlled system" administered by the government.

Initially the government attempted to intervene this "permuta market" by influencing pricing in the bonds traded or swapped with the issuance of "Bonos Cambiarios" resulting in a lower implicit rate of exchange for the USD, and in an effort to provide more liquidity to he market. Lately, the gap kept widening showing "Bonos Cambiarios" placed at an implicit rate of BsF. 5 to 5.50 per USD, yet the "permuta market" kept pushing upwards the implicit value of the USD to almost BsF. 8 per USD. During the last quarter, the lack of efficiency of CADIVI to liquidate controlled USD petitions for imports and other essentials, has shifted most of the economy to this "permuta market" with a distortion affecting inflation. In an effort to control prices for essential goods and services, the government launched an aggressive consumer protection initiative" with an outcome including "expropriations". The inflationary trend has not stopped, as well as the implicit devaluation of the USD in the permuta market bonds pricing. Scarcity of certain essential dietary items is resulting from the current situation, thus, activating a greater pressure over prices.

During the last few days the government has intervened several stock brokers and forex traders.

The Proposed Exchange Control Legal Reform. Today the National Assembly Finance Committee approved, for urgent discussion, a reform to the exchange control laws with the following proposed changes:

(i) To include "securities" in the scope of the law, thus treating "permutas" as a foreign exchange transactions covered by the exchange controls.
(ii) To include specific authority for the Central Bank to organize, intervene, regulate and control all forms of "foreign exchange transactions" including the transactions with USD denominated securities.

At the time of this LatAm Consulting Alert it is known that the legal reform proposed by the Finance Committee will come to the floor for discussion tomorrow. It is also known that cabinet members and Central Bank authorities are divided in regards to the next steps. Some voices claim the USD pemuta market should be made illegal, others, afraid of the practical implications, are promoting a "very regulated and institutionally organized and intervened market with the Central Bank as the clearing house for all transactions involving USD denominated securities". The final outcome will depend on the regulations to be issued under the new law. Meanwhile uncertainty reigns.

Actions. We are recommending to monitor events closely and commence a complete review of repatriation strategies, debt service, importation and any other transactions involving foreign exchange. Also, we are recommending to act prudently with regards to pricing of inventories.

We will follow the developments closely and issue updated Alerts.

LatAm Consulting Alert: Venezuela introduces Dual Foreign Exchange Control System with a significant devaluation

New foreign exchange regulation.

The Government of Venezuela has enacted the “Exchange Agreement No.14 between the Central Bank and the Ministry of Finance” published by Official Gazette 374.064 on 1/8/2010 (hereinafter “the new forex regulation”).

The new forex regulation creates a dual exchange system by introducing two official pegged controlled exchange rates: (i) 2.60 Bs.F per USD (applicable to what is herein defined as sector A); and (ii) 4,30 Bs.F per USD (applicable to what is herein defined as Sector B). Consequently, the devaluation of the official pegged control market rates is 20% and 100% for each sector respectively.

Sector A will only include the following essential industries, imports and transactions:

1. Food and health industries.

2. Heavy equipment imports

3. Public Sector transactions.

4. Remittances for dependents and students overseas.

Sector B includes all other listed remittances and non-essential imports authorized by CADIVI (the currency exchange board) at 4,30 Bs.F per USD. Payments of foreign debt, royalties and profit remittances (dividends) should be classified under Sector B. However, under article 7 of the new forex regulation it was not expressly defined which exchange rate will apply to foreign debt service. It is expected that royalties and dividends would be eligible tom the Bs.F. 4,30 per USD rate if CADIVI approves the remittances on a case-by-case basis; nonetheless, the authorities have not been very responsive to petitions for dividends and royalties lately.

Exporters will be allowed to retain up to 30% of their export proceeds.

The “Bond Swap” parallel market remains legal as an alternative, but the government has announced closer intervention. Towards that end, it is expected that the National Assembly will soon pass a reform to the exchange control law.

Finally, USD 7 billions will be transferred from the Central Bank international reserve to the FONDEM (Government Development Fund) to finance projects during 2010.

The Implications.

The government intends to loosen-up its CADIVI approvals to several imports and remittances at the new Sector B 4,30 per USD rates, but giving priority to Sector A. However, the Ministry of Light Industry and Trade (MILCO) have subjected non-essential imports to their prior approval. Unless and until the new implementing regulations become more flexible in regards to the MILCO approval requirement, the whole process should be problematic, thus, creating several distortions and further demand in the parallel “bond swap market”.

CADIVI currently supplies 60% of the foreign exchange market, and the government is planning to increase such allocations to 75% under new regulations. Uncertainty and increased demand in the parallel “bond swap market” will remain until the new forex regulations are fully implemented, and the tools of intervention by the authorities in the “bond swap market” are defined. Significant activity in the “bond swap market” has resulted in the last few days, with an implicit rate of exchange of approximately Bs.F 6.50 per USD, therefore, a 8% devaluation in the parallel market in a couple of days.

As a result of the new regulations, the resulting official average pondered pegged controlled rate could be estimated at 3,85 Bs.F per USD based on data indicating that sector A represented 26.5 %, and Sector B represented 73.5 % of CADIVI approvals during the last quarter of 2009. The bond swap market should continue to be the source for at least 25% of the foreign exchange transactions in Venezuela.

Inflation should have a significant increase in 2010 due to monetary expansion through government expenditures upon the devaluation and the transfer of 7 billions of international reserves to FONDEM by the Central Bank. Tension with the private sector pursuant to price controls and other intervention measures by the government is likely. The government has already intervened more than 70 businesses in the commercial sector for revising their prices after the devaluation.

Recommended actions.

1) Review cash repatriation strategies to determine if any remittances could be covered under sector B pursuant to the new regulations; or else determine whether to implement a repatriation strategy by means of the “bond swap market” monitoring the best rates that might be available in the following months.

2) Define an adequate financial strategy in this new context.

3) Review the availability and impact of larger domestic NOLs due to devaluation, as well as the inflationary adjustments impact of these measures, for tax purposes, in order to ensure proper planning.

4) Review the impact of the new regulations on pricing policies under tight consumer regulations and price controls.

5) Implement asset protection strategies to minimize the adverse impact of government intervention and eventual expropriation measures, which could be extended to commercial sectors and basic industries of the economy.