Cablegate: Commerce Das Dyck Meets Croatian Ministers of Economy And

DE RUEHVB #0285 0850547
R 260547Z MAR 07




E.O. 12958: N/A
SUBJECT: Commerce DAS Dyck meets Croatian Ministers of Economy and

1. SUMMARY: Deputy Assistant Secretary of Commerce Paul Dyck
discussed possible investment opportunities in Croatia with
Croatia's Minister of Economy and Minister of Finance. Dyck also
commended Croatia for its economic progress, notably in working to
resolve IPR issues. He also raised concerns expressed by US firms in
Croatia regarding unresolved taxation issues and urged the GoC to
take action. END SUMMARY.

2. During a meeting with Minister of Economy Branko Vukelic, DAS
Dyck expressed appreciation for the GoC's increasingly active
commercial relationship with the U.S. and said he was impressed by
initiatives to reinvigorate the economy, including the Investment
Promotion Agency, Hitro, the one-stop shop for information on
administrative procedures in establishing a business in Croatia, and
two recent programs: Hitro Res and the Export Offensive. DAS Dyck
mentioned the Department of Commerce's opening of the Invest in the
USA office. Dyck said U.S. firms are interested in investing in
energy, infrastructure and biotechnology projects in Croatia. He
noted, however, that U.S. firms are concerned about lack of
transparency and the high cost of the labor force in Croatia.

3. Vukelic said energy was an important sector for U.S. investment
and offered opportunities such as an LNG project and the Pan
European Oil Pipeline (PEOP) project. He said entrepreneurship and
industrial zones established throughout the country welcome foreign
investors. He added Croatia's infrastructure is already in place
with many established highways and rail lines. Vukelic also
explained Croatia's workforce is not cheap labor because it is a
knowledge-based society, but added that labor is less expensive than
in western Europe. He thanked USAID for helping to develop the small
and medium business sector and said the continuation of GSP will
help the economy develop further. He said Croatia has created an
agency for the protection of market competition, intended to ensure
that all rules are applied fairly and obeyed in the commercial
market. He added that he would like to see Croatia not only known as
one of the best tourist destinations, but also one of the best
business destinations.

4. Minister of Finance Ivan Suker told DAS Dyck that Croatia has
three objectives: macroeconomic stability, successful negotiations
with the EU and the creation of an entrepreneurial environment to
encourage domestic and foreign investment. He said he hopes to see
more companies, like Barr Pharmaceuticals, come to Croatia. DAS Dyck
commended Croatia for the handling of the Barr-Pliva sale, but said,
after meeting with several US firms over the two day visit, that
foreign companies still face challenges, especially in resolving
taxation issues. Specifically, DAS Dyck discussed concerns of
Xagent, an authorized Xerox agent, and Phoenix Trade, which
distributes Sara Lee products. Xagent reported that the GoC is
charging corporate tax on all of the revenues based on warranty-type
maintenance and supplies contracts for sold or leased equipment.
Phoenix Trade is being taxed on promotional activities; however,
according to Croatian law, companies are exempt from such payments
when the receiver of the promotional activities has its headquarters
abroad. Phoenix is appealing the Ministry of Finance ruling that the
company must pay taxes plus accumulated interest for promotional
activities. Ambassador Bradtke will submit specific information
about each firm directly to the Minister since the issues could not
be resolved during the meeting. DAS Dyck also said companies were
concerned about lack of transparency in the public procurement
process, which makes it difficult for some companies to participate.

5. Minister Suker said it is important for Croatia to be extra
vigilant on taxation matters regarding multinational companies to
guard against possible money laundering. He also said both of those
companies have resident status and therefore must abide by Croatia's
tax laws. He said Croatia is aligning its legislation with EU
legislation so there should be no question of transparency or of
taxation in Croatia. After the discussion, he said his ministry
would review both cases. Commenting on the procurement process,
Suker said Croatia changed the law two years ago, which should make
the process more transparent. He said the most difficult change will
be in the mindset of the people involved in the process. He said the
law should be fully implemented by the end of this year.

6. Suker also questioned the delay in negotiating a Bilateral Tax
Treaty between the U.S. and Croatia. DAS Dyck said he would work
with AMCHAM and U.S. firms to provide a status report to the U.S.
Treasury to advance Croatia in the queue. He said investments, such
as Barr, will help make Croatia a higher priority.


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