Foreign Relations of the United States, 1958–1960, Volume V, Microfiche Supplement, American Republics

VE–16. Memorandum from the Officer in Charge of Venezuelan Affairs (Bartch) to the Director of the Office of East Coast Affairs, Bureau of Inter-American Affairs (Bernbaum)¹

Washington, December 24, 1958

SUBJECT

• Venezuelan Decree Increasing Income Tax Rates

On December 20, the Venezuelan Junta of Government announced the promulgation of a decree effective immediately and applicable to 1958 income, raising the graduated income tax rates on all classes of income. The previous tax scale ranged from 1 1/2 per cent on the lowest income bracket to 26 per cent on income of Bs. 28 million ($ 8.4 million) and over. The new rates begin at 2 per cent and rise to 45 per cent on the top bracket of income. The change in the tax rates was a part of a general tax reform which also: abolished a Bs. 5 per Bs. 1,000 transactions tax, increased the normal income tax on foreign residents from 4 to 6 per cent, increased gambling taxes from 10 to 20. per cent, and provided for a partial exemption for investment in industry, agriculture, transportation and energy production. Although the increase in the general tax does not alter the basic 1948 legislation providing for a 50–50 additional tax applicable to oil and mining companies, it does in effect break the 50–50 concept. In a televised speech, Finance Minister Mayobre estimated that under the new tax scale the oil companies would have paid to the Government 66 per cent of their 1957 income, instead of the 51 per cent they actually paid. He forecasted that the companies would pay about 60 per cent of their 1958 income to the Government.

The action taken was certainly not unexpected, since all of the political parties’ campaign platforms contained statements to the effect that Venezuela should derive a greater share of the profits of the oil industry. The three presidential candidates and other party leaders have made frequent references to the need for a change in the profit formula. After the elections, Betancourt at a press conference stated that the 50–50 concept was antiquated but that it was too early to talk of 75–25. As on previous occasions, he stated that any adjustment necessary would be made only after very careful study. Neither is it surprising that the general income tax rates were increased, since they have long been considered antiquated; and the current unbalanced budget and the economic problems inherited from the previous government made such a revision imperative. An American professor was in Venezuela for several months earlier this year to study the tax structure and report on it to the Government.

What was surprising was the fact that, in contrast to previous actions affecting the petroleum industry, the income tax reform was kept secret until promulgated, and neither the oil industry nor other affected interests were given an opportunity to present their views to the Government. Moreover, despite our overriding interest in matters affecting Venezuela’s oil industry, we were neither consulted nor given any advance notification. This was all the more surprising in view of the fact that Assistant Secretary Mann was in Caracas when the decree was promulgated, having gone there for the second time this year to consult on U.S. oil imports policy.² Moreover, Mines Minister Julio Diez left a three-hour meeting with Mann to go directly to the television studio to participate in the announcement that the income tax decree had been formulated, without mentioning to Mr. Mann the reason for his departure from the Meeting. Mr. Mann stated that when he had expressed surprise that the Venezuelan Government had acted as it did, the Ministers of Finance and Mines had adopted an aggressive position, maintaining that the action taken by their Government was an act of national sovereignty. However, they became almost apologetic and defensive after Mr. Mann had expressed himself strongly, stating that Venezuela’s unexpected and unilateral action on an issue as sensitive as this, which not only affected directly U.S. investments but which could set off a chain reaction in other parts of the world and which is not unrelated to Western Hemisphere security, is inconsistent with Venezuela’s insistence on consultation before U.S. unilateral action affecting Venezuelan interests. Consultation, Mr. Mann informed the Venezuelans, is a two-way street. The Foreign Minister took the position that this was a general tax measure affecting all Venezuelans and therefore within the sovereign power of the Venezuelan Government. Mr. Mann and Ambassador Sparks replied that we did not question the sovereign right of the Government to take action; they emphasized the long established practice of American States and particularly Venezuela and the U.S. to consult in matters affecting important interests of the other. They pointed out that while the U.S. has the sovereign right to impose import restrictions on Venezuelan oil we nevertheless seek through consultation to act in such a way as to accommodate the interests of both countries.

Although everyone knew that Venezuela was moving in the direction of a modification of the 50–50 formula, it was not expected that any action would be taken until after the installation of the new Government, and then only after negotiations with the companies. Creole has stated that Betancourt had promised the company that no action would be taken with such negotiations. The consensus seems to be that Betancourt and his advisers were probably not consulted in advance concerning the new tax law, and that at best Betancourt was informed by the Government in very general terms several days in advance. This is Mr. Mann’s impression, and Betancourt informed our Embassy that he had known nothing of the tax change when he had promised Mr. Haight of Creole earlier in the week that closed door discussions with the industry would be held in advance of any changes in oil income distribution.

Preliminary estimates reported by our Embassy of the effect of the tax revision on the oil industry are that it will vary according to the different companies’ incomes. Creole’s initial estimate is that it may result in a 65–35 per cent of the company’s profit, and that others in high income brackets will be effected to a lesser degree. New companies not yet out of the red would be effected in the future if and they move into higher income brackets.

Reaction to the promulgation of the tax decree was not long in forthcoming. Duke Haight, President of Creole, issued a strong statement on December 22 at Marquetia airport on his departure for San José³ on a Christmas vacation. He said the Government’s action was a “hard blow” at the industry and that it “drastically altered the climate for foreign investment”. He said that by this action Venezuela became the first country in the world to break the 50–50 principle, “completely disregarding acquired rights and ignoring moral, if not legal, obligations to negotiate” with interested parties. He warned that an agreement reached by free negotiation “cannot be unilaterally terminated without destruction of confidence and understanding”. The present “unilateral, retroactive action provides no quid pro quo and reduces the incentive to further investment”, he said. He added that the new taxes were additional costs for the industry.

The other oil companies agreed generally with Mr. Haight’s strong statement, with Shell sending a letter to the Minister of Mines on December 23 warning that abandonment of the 50–50 formula without prior discussions would have “grave consequences”. El Mundo characterized Haight’s statement as a crude and unjustified reaction against an act of full sovereignty. Venezuelan students and government economists generally praised the Government’s action although some of the latter were dubious of the way it was carried out. Many local businessmen were angry or dismayed over the lack of public discussion, Venezuelan businessmen avoided commenting on the effect of the decree on the oil companies but instead concentrated on the repeal of the 5 per thousand tax and other features of interest to local business. Dr. Angel Carvini, generally regarded as business spokesman, deplored the lack of consultation with commerce and industry. El Nacional mentioned the “sense of justice which inspired reform and which the whole nation shares.”

In reply to Mr. Haight, Mines Minister Diez issued a statement on December 23 saying that the tax reform “does not impair any acquired rights of petroleum companies nor modify any existing agreement with them”. He emphasized that it only altered internal tax rates which apply to all Venezuelans and is the sovereign right of the Government. Since the tax applies only to net income it does not increase the cost of the companies and does not alter their competitive position, he said. Most Venezuelan opinion thought Haight’s statement was too strong and inadvisable, and the press supported the government as having only exercised its sovereign right. However, many Venezuelan business and professional men reportedly were not in accord with the secrecy involved and were cynical about the purposes of the act. COPEI reserved its position until it had further time to study the decree; AD did the same. However, Villalba of URD issued a strong statement supporting the decree and attacking Creole. He called Haight’s statement absurd and referred to the billion dollars⁴ Eugene Holman of the Standard Oil Company (New Jersey) on December 23 was as strong, if not stronger, than Haight’s, warning that the Venezuelan Government action would “call for re-examination of international investments”. On the following day, Venezuelan Ambassador Falcon Briceno released a statement emphasizing that the decree was an act of national sovereignty, and that the Government had no obligation to obtain Creole’s permission to act.

The net result of the position taken by Creole and Jersey Standard is that the issue has now become one involving national sovereignty, with the Venezuelans standing on their national pride. Just as the threatened U.S. troop movement overshadowed the anti-U.S. incidents that occurred during Vice President Nixon’s visit to Venezuela last May, the national sovereignty issue overshadows the issue over lack of advance consultation with the companies and the U.S. Government. The Venezuelan Government was dissuaded from issuing a decree expelling Haight only by a promise from Creole that Haight would not return to Venezuela.

Recommendations:

That, in your conversation today with the Venezuelan Ambassador,⁵ you emphasize the following points:

1. We are very seriously concerned over the action taken by the Venezuelan Government.

2. We recognize the fact that the Government has a perfect right to take such action, but there are many things that we have the power to do but have refrained from doing out of consideration of the interests of other countries.

3. We have consulted with our friends before taking unilateral action on matters affecting their interests, and we have made a very special effort to consult with Venezuela.

4. We would have expected that the Venezuelans would have consulted with us in advance before taking a step which effected the operation of important U.S. interests in Venezuela, and which may have repercussions elsewhere in the world.

5. An additional factor was that Assistant Secretary Mann was in Venezuela at the time the decree was promulgated, on his second visit to Venezuela in a year, solely to consult with the Venezuelan Government concerning oil import policies. Nothing was said to him about the decree until it was announced to the public.

6. In the spirit of cooperation which characterizes our relations with Latin America, consultation plays an important part. The Latin American nations never hesitate to tell us what our policies should be, and we are very pleased to receive their views and to consult with them in advance in order to mitigate the possible adverse effects of any action we contemplate taking.

7. In summary, we consider the action the Venezuelan Government has taken as very serious, especially since it was taken without consultation with us, and since it may have repercussions in other areas of the world. We would hope that the Ambassador will report our concern to his Government.

1. Source: Department of State, Central Files, 831.112/12–2458. Confidential.
2. Assistant Secretary Mann was in Caracas, December 18–21, 1958. The purpose of his visit was to explain and discuss the current oil imports situation and to explore informally future means to deal with problems, including possible tripartite arrangements. (731.11/12–1858) A summary of his conversations with Venezuelan officials is contained in ARA/EST Files, Lot 61 D 319, “U.S. Oil Legislation.”
3. The source text reads “Jamaica” but was hand-corrected to read “San José.”
4. A handwritten marginal notation reads: “something missing here.”
5. A summary of the conversation is contained in the Department’s telegram 382 to Caracas December 24, 1958. (831.112/12–2458)