VZCZCXRO9498
RR RUEHAO RUEHCD RUEHGA RUEHGD RUEHGR RUEHHA RUEHHO RUEHMC RUEHNG
RUEHNL RUEHQU RUEHRD RUEHRG RUEHRS RUEHTM RUEHVC
DE RUEHCV #0174/01 0261212
ZNR UUUUU ZZH
R 261212Z JAN 07
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 7609
INFO RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RUCPDOC/DEPT OF COMMERCE
RUEATRS/DEPT OF TREASURY
RUEHRC/DEPT OF AGRICULTURE USD FAS
RUCPCIM/CIMS NTDB WASHDC

UNCLAS SECTION 01 OF 06 CARACAS 000174 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EB/IDFD/OIA, WHA/AND 
STATE PASS TO USTR 
COMMERCE FOR 4431/MAC/WH/MCAMERON 
TREASURY FOR KLINGENSMITH AND NGRANT 
 
E.O. 12958: N/A 
TAGS: ECON EINV EFIN KTDB STR OPIC VE
SUBJECT: VENEZUELA -- INVESTMENT CLIMATE STATEMENT (PART 
2/2) 
 
REF: 06 SECSTATE 178303 
 
---------------------------------- 
A.7. Protection of Property Rights 
---------------------------------- 
 
--------------------------- 
A.7.1. Real Property Rights 
--------------------------- 
 
Foreign investors may pursue property claims through 
Venezuela's legal system.  While the legal system's 
procedures are lengthy, judgments are uneven, allegations of 
corruption common, and the system itself is overtly 
politicized, there is little evidence that the legal system 
discriminates against foreign investors. 
 
----------------------------------- 
A.7.2. Intellectual Property Rights 
----------------------------------- 
 
Venezuela is a member of the World Intellectual Property 
Organization (WIPO).  It is also a signatory to the Berne 
Convention for the Protection of Literary and Artistic Works, 
the Geneva Phonograms Convention, the Universal Copyright 
Convention, and the Paris Convention for the Protection of 
Industrial Property.  Venezuela implements its obligations 
under the WTO Agreement on Trade-Related Aspects of 
Intellectual Property Rights (TRIPS) through Andean Community 
Decision 486.  Despite Venezuela's withdrawal from CAN in 
2006, pact norms are reported to continue to be in place. 
 
The Venezuelan Industrial Property Office (SAPI) leaves much 
room for improvement, and its actions and occasional publicly 
stated antagonism towards IPR often draw criticism from IPR 
advocates and rights holders.  IPR protection is also 
hindered by the lack of adequate resources for the Venezuelan 
copyrigh4lA~pQQsion, including an anti-piracy law 
and the introduction of a tax on street vendors.  According 
to industry representatives, SENIAT seems to be a promising 
enforcement entity due to its better technical and financial 
capabilities. 
 
Unfortunately, pirated software, music and movies remain 
readily available throughout the country.  In the 2006 Annual 
Review, Venezuela remained on USTR's Special 301 "Priority 
Watch List."  The Anti-contraband Law (December 2, 2005, 
Official Gazette 38,327) creates a framework for contraband 
in Venezuelan customs which did not previously exist in 
Venezuela and a new Intellectual Property Rights regulation 
looks to enforce IPR violations in Venezuelan customs. 
 
----------------------------- 
A.7.3. Patents and Trademarks 
----------------------------- 
 
Venezuela provides the legal framework for patent and 
trademark protection through Andean Community Decision 486 
and the 1955 National Industrial Property Law.  Andean 
Community Decision 486 takes major steps towards bringing 
Venezuela into WTO TRIPS compliance.  However, without 
corresponding local laws, Venezuela is not completely TRIPS 
compliant.  Andean Community Decision 345 covers patent 
protection for plant varieties. 
 
U.S. companies will continue to monitor the impact of the 
Andean Tribunal's 2002 interpretation of Articles 14 and 21 
of Decision 486, which do not allow for the patenting of 
"second-use" products (e.g. new uses of previously known or 
patented products).  Under pressure from the Andean Community 
and in line with some changes in leadership at SAPI, 
Venezuela has revoked previously issued patents.  Very few 
patents for new pharmaceuticals were awarded in 2004 and none 
were issued in 2005 or 2006.  Since 2002, Venezuela's food 
and drug regulatory agency (INH) began approving the 
commercialization of new drugs, which were the bioequivalent 
of innovative drugs that previously received INH marketing 
approval, thereby denying the innovative drug companies 
protection against unfair competition of their test data as 
required by TRIPS.  In effect, the government now allows 
 
CARACAS 00000174  002 OF 006 
 
 
unfair reliance on the test data, which required lengthy and 
expensive development, to be used by others seeking marketing 
approval for the same products. 
 
---------------- 
A.7.4 Copyrights 
---------------- 
 
Andean Pact Decision 351 and Venezuela's 1993 Copyright Law 
provide the legal framework for the protection of copyrights. 
 The 1993 Copyright Law is modern and comprehensive and 
extends copyright protection to all creative works, including 
computer software.  A National Copyright Office was 
established in October 1995 and given responsibility for 
registering copyrights, as well as for controlling, 
overseeing and ensuring compliance with the rights of authors 
and other copyright holders.  Industry experts are concerned 
about a proposed new copyright law proposal, which would 
require the mandatory registry of works, reduce protection 
terms, hamper distribution agreements and increase royalties. 
 
The Venezuelan copyright and trademark enforcement branch of 
the police (COMANPI) continues to provide copyright 
enforcement support with a small staff of permanent 
investigators.  A lack of personnel, coupled with a very 
limited budget and inadequate storage facilities for seized 
goods, has forced COMANPI to work with the National Guard and 
private industry to improve enforcement of copyrighted 
material.  COMANPI can only act based on a complaint by a 
copyright holder; it cannot carry out an arrest or seizure on 
its own initiative, which leads to weaker enforcement. 
 
Venezuela does not automatically recognize foreign patents, 
trademarks or logotypes, so foreign investors must be sure to 
register patents and trademarks appropriately and in as many 
categories as are applicable.  It is advisable not to have 
agents or distributors do this in their name because the 
agent can then claim that he/she is the registered owner of 
the trademark in question. 
 
The National Assembly has also been considering a Copyrights 
bill for some time.  The bill, which was proposed by 
Venezuela's IPR regulator SAPI, has been very controversial 
and raised serious concerns in the private sector.  Among 
other things, the bill calls for the local registration of 
all works, certification by a government-appointed commission 
to approve the copyright, a significant raise of royalty 
rates, and a provision to expropriate works if in "national 
interest".  The new Film Law before the National Assembly is 
equally worrisome to the private sector, as it mandates 
obligatory screening of national films, higher taxation on 
the sector, and it requires domestic production of film 
equipment and copies. 
 
-------------------------------------- 
A.8. Transparency of Regulatory System 
-------------------------------------- 
 
------------------------ 
A.8.1. Legal Environment 
------------------------ 
 
The Government of Venezuela adopted three laws in the early 
1990's to promote free market competition and prevent unfair 
trade practices: an Anti-Trust Law (Gazette No. 34,880 of 
1992), an Antidumping Decree (Gazette No. 4,441 of 1992), and 
a Consumer Protection Law (Gazette No. 4898 of 1995). 
 
Venezuela also passed a government procurement law that came 
into effect in 2001.  The law supposedly increases 
transparency in the competitive bidding process for contracts 
offered by the central government, national universities, and 
autonomous state and municipal institutions.  Despite this 
legal framework, there is little transparency in Venezuela 
and many contracts, if not the vast majority, are awarded 
without open competition. 
 
------------------------------------------- 
A.8.2. Tax Treatment of Foreign-Owned Firms 
------------------------------------------- 
 
All companies and individuals are required to register with 
the national tax authority (SENIAT).  Income received from 
 
CARACAS 00000174  003 OF 006 
 
 
any economic activity carried out in Venezuela is subject to 
taxation. 
 
Foreign companies receive equal treatment as national 
companies and are subject to the corporate tax regime. Except 
for the petroleum sector, the current Venezuelan income tax 
law does not differentiate between foreign-owned and 
Venezuelan-owned firms.  The income tax rate is progressive 
based on income, ranging from 6 percent to 34 percent. 
Companies involved in hydrocarbon and related activities pay 
50 percent, except associations formed under the Hydrocarbons 
Law, which receive a different treatment.  Companies involved 
in mining pay 60 percent.  The Business Assets Law imposes a 
one percent tax on business assets (Gazette No. 4654 of 
1993).  The assets tax is assessed on the gross value of 
assets (with no deduction for liabilities) after adjustments 
for depreciation and inflation 
 
Venezuela has international double taxation agreements in the 
areas of air and sea transport with several countries, 
including the Unites States.  A US/Venezuelan treaty to avoid 
double taxation went into effect on January of 2001. 
 
SENIAT is undertaking a very aggressive tax collection 
program called "The Zero Evasion Plan" which has 
significantly boosted fiscal revenues.  Highly publicized 
raids have taken place and businesses, including 
multinational firms, have been temporarily closed 
administratively.  Firms subject to these measures complain 
that these closures have been imposed for minor paperwork 
violations as opposed to actual tax evasion. 
 
In 1999, the government replaced the wholesale tax (ICVSM) 
with a value-added tax (IVA).  The value-added tax rate is 
currently 14 percent. 
 
-------------------------------------------- 
A.9. Efficient Capital Markets and Portfolio Investment 
-------------------------------------------- 
 
---------------------- 
A.9.1. Capital Markets 
----------------------- 
 
Access to the Venezuelan secondary capital market is 
relatively easy, and U.S. firms essentially enjoy treatment 
equal to that of domestic firms.  Foreign companies may issue 
common and preferred stocks, bonds, and other securities in 
Venezuelan capital markets.  Foreign investors may also buy 
shares directly in Venezuelan companies or on the stock 
exchange. 
 
The Caracas Stock Exchange (CSE) is a privately owned 
corporation in operation since 1947.  Trading on Venezuelan 
stock exchanges is thin and highly concentrated.  The 
Venezuelan Futures and Options Clearinghouse (CACOFV), the 
first market of its kind in the country, started operations 
in Caracas in September 1997.  Membership in local capital 
markets is open to both individuals and legal entities. 
 
A Capital Markets Law came into effect in September 1998 
(Gazette No. 36,565 of 1998).  It gives autonomy to the 
National Securities Commission (CNV) and provides regulations 
for intermediaries, establishes new conditions for public 
offerings, enhances the transparency of brokerage operations, 
and makes regulations more flexible for small firms that wish 
to issue stocks. 
 
The Congress passed the Collective Investment Companies Law 
(Gazette No. 36,027 of 1996) to foster the development of 
Venezuela's capital market through the creation of collective 
investment companies.  The law, which is designed to make 
capital market investments more attractive for small and 
medium investors, opened the door to the establishment of 
mutual funds, collective investment venture capital 
companies, and collective real estate investment companies. 
CNV issued capital requirements for collective investment 
companies in 1998 (Gazette No. 36,027 of 1998).  The Caracas 
Stock Exchange (CSE) index closed above 50,000 in 2006, 
increasing over 155 percent from the end of the previous 
year.  GDP growth, coupled with negative real interest rates 
for deposits and CDs and a lack of alternative investment 
opportunities largely fueled to this increase. 
 
CARACAS 00000174  004 OF 006 
 
 
 
--------------------- 
A.9.2. Credit Markets 
--------------------- 
 
The Venezuelan financial system recovered strongly from a 
crisis in the mid 90's that caused the failure of a number 
of institutions.  Banks tend to register higher profits than 
those in other countries in the region.  Much of this is 
attributable to exchange controls which limit the ability of 
the owners of capital to transfer it outside of the country. 
The purchase in recent years of several troubled banks by 
large foreign banks also injected much needed capital, 
technology, and competition into the sector.  Foreign banks 
have also taken a minority interest in several other local 
banks.  Consequently, foreign banks now control approximately 
32 percent of all banking sector assets.  Venezuelan banks 
have become increasingly dependent on the public sector as a 
borrower.  It is currently estimated that approximately 32 
percent of banks' total assets is made up of government debt. 
 
Financing is available from a variety of sources and does not 
discriminate against foreign investors seeking access to 
credit.  Banks cannot lend more than 10 percent of their 
assets to any one borrower. 
 
A major concern for the financial system is the recent legal 
requirement that forces banks to lend a percentage of their 
portfolio to specific economic sectors at preferential rates 
fixed by the local authorities.  Thirty-one percent of 
commercial bank lending is directed by law to housing, 
agriculture, micro-business, and tourism.  These loans are of 
concern because the mandated rates are well below market 
rates and below the fairly high Venezuelan inflation rate (17 
percent in 2006). 
 
------------------------ 
A.10. Political Violence 
------------------------ 
 
No major incidents were confirmed against foreign-owned or 
operated companies, projects, or installations in Venezuela 
in 2006. 
 
---------------- 
A.11.a. Corruption 
---------------- 
 
Corruption is a very serious problem in Venezuela and appears 
to be worsening.  According to Transparency International's 
Corruption Perceptions Index, Venezuela is the second most 
corrupt country in Latin America and one of the most corrupt 
in the world.  Venezuela has a regulatory system to prevent 
and prosecute corruption and accepting a bribe is a criminal 
act.  Penalties include fines and/or prison sentences. 
Historically, the country has lacked an effective judicial 
system to provide judicial security for either foreign or 
national residents.  The problem persists today, and is 
exacerbated by the overt politicization of the judicial 
system.  The 1999 constitution also gives the central 
government enhanced powers to investigate cases of corruption 
and oversee the use of government funds. 
 
Government tenders are the most vulnerable to corruption 
because the tender process frequently lacks transparency. 
Critics have also targeted the current regime of government 
price and exchange controls as a source of corruption. 
 
--------------------------------------- 
A.11.b. Bilateral Investment Agreements 
--------------------------------------- 
 
Venezuela currently has bilateral investment agreements in 
force for the promotion and protection of investment with the 
following countries: Argentina, Barbados, Canada, Chile, 
Costa Rica, Cuba, the Czech Republic, Denmark, Ecuador, 
Germany, Lithuania, Netherlands, Paraguay, Peru, Portugal, 
Spain, Sweden, Switzerland, the United Kingdom and Uruguay. 
France and Belgium have signed agreements that are still 
awaiting legislative approval.  No agreement exists with the 
United States. 
 
--------------------------------------------- ------- 
 
CARACAS 00000174  005 OF 006 
 
 
A.11.c. OPIC and Other Investment Insurance Programs 
--------------------------------------------- ------- 
 
OPIC currently has significant exposure in Venezuela, as does 
the Export-Import Bank.  However, OPIC is statutorily 
obligated to suspend operations in Venezuela due to 
VenezuelaQ,s failure to achieve certification under the 
anti-narcotics trafficking laws.  Also, the expropriations 
claim by SAIC to OPIC remains outstanding.  Please refer to 
the section on Expropriations and Compensation for 
information on OPIC.  In April 2003 Ex-Im Bank formally 
placed Venezuela "off cover" for new lending where it 
currently remains. 
 
------------- 
A.11.d. Labor 
------------- 
 
Venezuela's total labor force (all persons 15 years of age 
and older who are working or looking for work) was 12.5 
million at the end of October 2006.  According to the 
National Institute of Statistics (INE), 1.1 million, or 8.9 
percent, were unemployed.  Persons are considered as employed 
if they work at least 1 hour per week and INE does not count 
as unemployed the hundreds of thousands of Venezuelans 
enrolled in government social programs.  Of the 11.3 million 
employed workers, approximately 45 percent work in the 
informal sector (as street vendors, domestics, small 
entrepreneurs, etc.).  The government employs about 1.8 
million of those working in the formal sector. 
 
The major labor organizations in Venezuela are the 
independent Confederation of Venezuelan Workers (CTV) and the 
National Workers Union (UNT).  The CTV was founded in 1936 
and dominated the trade union movement in Venezuela prior to 
the election of President Chavez.  The UNT enjoys support 
from the Venezuelan government and has been growing since its 
inception in 2003. 
 
President Caldera signed landmark legislation in June 1997 
(Gazette No. 5152 of 1997) to reform the outdated and 
unworkable severance pay system in the Organic Labor Law. 
The legislation was based on a framework agreement negotiated 
among representatives from the government, private business, 
and organized labor. Under the previous severance pay system, 
departing employees received one month's salary (two months 
if they left involuntarily) for each year worked based on 
their current pay.  The 1997 system did away with 
"retroactivity" (i.e. basing the entire benefit on current 
salary) and requires employers to calculate their severance 
pay obligations annually and to make monthly deposits into a 
pension fund, an employer account, or an outside trust 
account.  A reform in 2005 limited these payments to the 
equivalent of 60 percent of their annual salary. 
 
The 1997 Organic Labor Law also provides that the minimum 
wage will be reviewed at least once a year and may be 
adjusted based on considerations such as the "food basket." 
A minimum wage of Bs. 512,325 (USD $238) per month took 
effect in September 2006. 
 
The Organic Law Pertaining to the Integral Social Security 
System (Gazette No. 5199 of 1997) provides the general 
framework for the social security structure.  Congress passed 
a social security reform in 1998, but the system remained 
under review by the Chavez government, until 2002, when the 
National Assembly passed the Social Security System Organic 
Law (Gazette No. 37600).  However, the full application of 
this law that covers everybody that contributes or not with 
the expenses, will depend on the fiscal reforms. 
 
The Organic Labor Law places quantitative and total wage cost 
restrictions on the employment decisions made by foreign 
investors.  Article 27 of the Labor Law requires that the 
number of foreigners hired by an investor not exceed 10 
percent of a company's employees, while salaries paid to 
foreigners may not exceed 20 percent of the total company 
payroll. Article 28 allows for temporary exceptions to 
Article 27 and outlines the requirements for hiring technical 
expertise when equivalent Venezuelan personnel are not 
available.  Article 20 of the law requires that industrial 
relations managers, personnel managers, captains of ships and 
airplanes, and foremen be Venezuelan.  Article 19 requires 
 
CARACAS 00000174  006 OF 006 
 
 
that all orders and instructions to workers be given in 
Spanish. 
 
The Venezuelan government has imposed a freeze, renewed every 
six months, on layoffs.  Thus, reductions-in-force require 
the negotiation of severance packages in exchange for 
voluntary resignation. 
 
-------------------------------------- 
A.11.e. Foreign-Trade Zones/Free Ports 
-------------------------------------- 
 
The Free-Trade Zone Law (Gazette No. 34,772 of 1991) provides 
for free trade zones/free ports.  The three existing free 
trade zones are located in the Paraguana Peninsula on 
Venezuela's northwest coast, Atuja in the State of Zulia and 
Merida (but only for cultural, scientific, and technological 
goods).  These zones provide exemptions from most import and 
export duties and offer foreign-owned firms the same 
investment opportunities as host country firms.  The 
Paraguana and Atuja zones provide additional exemption of 
local services such as water and electricity.  Venezuela has 
two free ports that also enjoy exemptions from most tariff 
duties: Margarita Island (Nueva Esparta) and Santa Elena de 
Uairen in the state of Bolivar. 
 
-------------------------------------------- 
A.11.f. Foreign Direct Investment Statistics 
-------------------------------------------- 
 
The stock of U.S. foreign direct investment (FDI) in 
Venezuela in 2005 was USD $9.6 billion according to U.S. 
Department of Commerce statistics.  U.S. FDI in Venezuela is 
concentrated largely in the petroleum, telecommunications, 
manufacturing and finance sectors. 
 
The estimated U.S. trade deficit with Venezuela for 2006 is 
projected at USD $30.3 billion, an increase of USD $2.7 
billion from the trade deficit of USD $27.6 billion in 2005. 
In 2006, U.S. goods exports to Venezuela were approximately 
USD $8.5 billion, up USD $2.1 billion from 2005.  U.S. 
imports from Venezuela are estimated at about USD $39 billion 
in 2006, an increase of USD $5 billion from the level of 
imports in 2005. The large increase in imports is related 
primarily to the increase in the price of petroleum, which 
represents the vast majority of U.S. imports from Venezuela. 
 
-------------------------- 
Contacts and Web Resources 
-------------------------- 
 
Andrew N. Bowen, Economic Counselor 
U.S. Embassy, Caracas 
Unit 4956 
APO  AA 34037 
Tel: 58 212 907 8412 
Fax: 58 212 907 8033 
Email: BowenAN@state.gov 
 
Darnall Steuart 
Deputy Director Venezuela Desk 
Office of Andean Affairs 
U.S. Department of State 
Tel: 202 647 4216 
Fax: 202 647 2628 
Email: McIsaacKJ@state.gov 
 
Venezuela's Superintendent of Foreign Investment (SIEX): 
www.siex.gov.ve. 
Venezuela's Intellectual Property Rights Office (SAPI): 
www.sapi.gov.ve 
 
BROWNFIELD