Originally published November 2004

Background

To avoid the exportation of indirect taxes, Article 69(a) of the Internal Tax Regime Law recognizes the right to a refund for value added tax (VAT) paid on the importation and local acquisition of goods and services used for the production of export goods. Based on this legal provision, companies with upstream contracts have claimed from the Internal Revenue Service a refund of the VAT paid on the production of the oil they produce and export. The service rejected this claim, arguing, among other things, that: (i) petroleum is not produced, but is rather extracted; and (ii) oil companies had already considered this cost when establishing in the upstream contracts they executed with the state their participation in the production of petroleum extracted from their oil fields.

The refund claims have been the subject of different lawsuits filed by oil companies with national courts and arbitration proceedings initiated by some companies to achieve compensation where their rights were not respected within the legal framework applicable to their contracts.

In this context, the following amendments have been made to the legal system.

Commission of the Andean Community Decision

In a meeting in Quito on July 12 2004 the Commission of the Andean Community of Nations approved Decision 599, published on July 16 2004 in the Official Gazette of the Cartagena Agreement. The decision aimed to harmonize VAT procedures.

Article 40 of Decision 599 provides that the decision will not be directly applicable in member states after its publication as is generally the case with the commission's decisions. Instead, each member state is to implement the decision into national law under its own constitutional requirements. Therefore, Decision 599 will enter into effect, according to Article 40, "on the first calendar day of the month after the date of the last deposit of the corresponding instrument at the Secretariat General of the Andean Community". However, member states may further defer the application of some provisions pursuant to the transitional rules provided by the decision.

The ability to stipulate that Decision 599 will not be incorporated immediately into the law of each member state is provided in Article 3 of Decision 472, which contains the Treaty Creating the Andean Court of Justice of the Andean Community. According to Article 3:

"The decisions of the Andean Council of Ministers of Foreign Affairs or the Andean Commission and the Resolutions of the Secretariat General shall be applicable directly in member states from their date of publication in the Official Gazette of the Cartagena Agreement, unless such decisions indicate a later date."

Article 32 of Decision 599 is relevant to VAT refunds for oil companies that have executed upstream contracts with the state and provides the following:

"Notwithstanding the systems applicable to fixed assets and capital goods, for purposes of the zero-rating system, taxpayers who establish credit balances for exportation in their tax declarations are entitled to recover such balances in accordance with the internal legislation of each member state."

The legislation of each member state may establish the proportion of the amount of the exportations that shall apply for reimbursement.

The right to reimbursement of VAT will be deemed satisfied with respect to cases involving contracts with the state when another form of alternative compensation in exploitation contracts for non-renewable natural resources has been established, and is paid in the purchase of goods and services by the contracting company, when determined by the member state.

The transitional provision is as follows:

"Member states which at the effective date of this decision do not reimburse the tax on transactions involving services used for the exportation of goods may maintain this rule up to six years from the effective date of this decision."

Interpretation of the Internal Tax Regime Law

Through Law 41/2004, published in Official Gazette 387 of August 11 2004, the National Congress interpreted Article 69(a) as follows:

"Article 69(a)...shall be interpreted to mean that refunds for VAT do not apply to petroleum activities with respect to the extraction, transportation and marketing of crude petroleum, since petroleum is not fabricated, but rather is extracted from reservoirs."

The purpose of issuing a law that interprets, rather than amends, was to enable it to have retroactive effect, pursuant to Rule 23 of Article 7 of the Civil Code. According to Article 7:

"Laws which are limited to declaring the meaning of other laws shall be understood as incorporated into them, but shall not alter, in any way whatsoever, the effects of final court rulings in the time between."

One of the several objections that could be made to this interpretative law is that the retroactive effect may not be possible under the constitutional rules in effect. Article 257 of the Constitution provides: "Tax laws shall not be issued with retroactive effect to the detriment of taxpayers." This matter would be subject to the decision that the courts reach in each case. In order to reach a decision, the courts should apply Article 272 of the Constitution, which states the following:

"The Constitution prevails over any other legal rule. The provisions of organic and ordinary laws, decree-laws, decrees, statutes, ordinances, regulations, resolutions and other acts by public powers shall be consistent with the rules of the Constitution and shall have no value if, in any way, they are contradictory to the Constitution or alter its rules. In the case of any conflict between rules of a distinct hierarchy, the courts, tribunals, judges and administrative authorities shall resolve the conflict by applying the higher ranking rule."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.