The excessive non-deductible taxes proposed by the law, as well as the threat of expensive lawsuits by foreign and national oil companies against the government, have been two major factors in the president's refusal to approve the law (which has already been passed by the Representatives Chamber).
The oil companies have rejected the proposed law for the following reasons:
- The joint venture agreements executed with the government would be frozen, violating the provisions of the current Hydrocarbon Law;
- The law would affect the oil companies' rights to independence and self-governance;
- The oil companies wish to preserve the continuity of the free commercialization of hydrocarbons;
- The new contracts set out by the law are considered unfeasible; and
- The oil companies would be subject to a non-deductible tax of 32%, which they have so far refused to accept.
The new law proposed by the Representatives Chamber sets out 18% in royalties and a 32% direct tax over production, non-deductible against other taxes. The law proposed by the president, however, proposes the same royalties of up to 18% over the exploitation of gas, but favours the oil companies by allowing them to deduct the 32% from other taxes. In addition, this tax does not differentiate between large or small, developing or non-developing oil fields, which would discriminate against fields that supply oil mainly to the countryside, as they would not be able to support this type of taxation. As this tax would be enforced from the first day of oil production, it would make the development of new fields or future explorations unattractive to foreign investors.
Congress is aware that the formula of 18% and 32% non-deductible tax is not a progressive solution for the country, considering that oil companies must also pay other royalties (ie, external remedies and annual profit taxes), leading to a total of approximately 60% in taxes and royalties. An increase in the 18% royalty on the production of hydrocarbons - set out in the joint venture agreements - could lead to the oil companies initiating million-dollar lawsuits against the government. The indigenous Socialist leader Evo Morales, as well as the opposition parties in Congress, have protested this situation, making the approval of this law even harder for the legislature to achieve.
Currently the acquisition of the direct tax over production generates an annual income of $136 million for the government. The president's proposed law could increase this revenue to up to $350 million, while the implementation of a 32% non-deductible tax could lead to revenues of $750 million.
The implementation of hydrocarbon legislation requiring high taxes would bring a lack of certainty to the sector, which may discourage new investment.
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