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Cablegate: Argentina: 2008 Investment Climate Statement

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DE RUEHBU #0058/01 0161135
ZNR UUUUU ZZH
R 161135Z JAN 08
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 0052
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
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RUEHMD/AMEMBASSY MADRID 1962
RUEHFR/AMEMBASSY PARIS 1348

UNCLAS BUENOS AIRES 000058

SIPDIS

SIPDIS

DEPARTMENT FOR EB/IFD/OIA

PASS NSC FOR MICHAEL SMART

PASS FED BOARD OF GOVERNORS FOR ROBITAILLE

PASS USTR FOR DUCKWORTH AND SULLIVAN

TREASURY FOR MATTHEW MALLOY

USDOC FOR 4322/ITA/MAC/OLAC/PEACHER

US SOUTHCOM FOR POLAD


E.O. 12958: N/A

TAGS: ECON EINV ETRD OPIC KTDB USTR PGOV AR

SUBJECT: Argentina: 2008 Investment Climate Statement


Ref: 07 State 158802


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Openness to Foreign Investment

------------------------------


1. Argentina remains open to foreign investment. Five

consecutive years of real GDP growth over 8 percent have

attracted considerable U.S. and other international

investor interest in exploring opportunities in the

Argentine market. The government of Argentina, in turn,

has signaled its desire to see foreign direct investment

(FDI) expand significantly to enhance the nation's

productive capacity and sustain high levels of real GDP

growth. However, legal uncertainties concerning creditor

and contract rights and frequent and unpredictable

regulatory changes diminish the attractiveness of some

sectors for foreign investors.


In 1991, the government of Argentina (GOA) pegged the

Argentine peso to the U.S. dollar at a 1:1 exchange rate

(""convertibility"") with the aim of breaking the back of

hyperinflation and adopted far-reaching market-based

policies, including dismantling a web of protectionist

trade and business regulations, and reversing a half

century of statism by implementing an ambitious

privatization program. Argentina subsequently received

significant increases in investment, with FDI inflows among

the highest in Latin America through most of the 1990s.

While convertibility defeated inflation, over time the

rigidity that it imposed on exchange rate policy, combined

with lack of fiscal discipline and poor governance,

undermined Argentina's export competitiveness and created

chronic deficits in the current account of the balance of

payments, which were financed by massive borrowing. The

contagion effect of the Asian financial crisis of 1998

precipitated an outflow of capital that contributed to a

four-year recession that culminated in a financial panic in

November 2001.


In January 2002, the government ended convertibility and

defaulted on roughly $82 billion in privately held debt and

over $6 billion in debt to official government creditors

(including approximately $360 million owed to the U.S.

government). In February 2005, private investors holding

76 percent of Argentina's defaulted debt accepted an

Argentine government offer of approximately 30 cents on the

dollar of old debt. Some remaining ""holdout"" private

bondholders are still actively seeking redress but, as of

this writing, the GOA has declined to deal with private

bondholders who chose not to participate in the 2005

restructuring. Of the over $6 billion owed to official

government creditors, over $4 billion consists of arrears

and past-due interest. The GOA has indicated interest in

normalizing its relationship with official government

creditors.


Argentina posted real GDP growth of 8.8 percent in 2003,

9.0 percent in 2004, 9.2 percent in 2005, 8.4 percent in

2006, and an estimated 8.5 percent in 2007. This

impressive economic recovery, which has also led to

improvements in key socio-economic indicators, can be

attributed to a number of factors. These include

Argentina's post-crisis move to a flexible exchange rate

regime, sustained global and regional growth, a boost in

domestic aggregate demand via monetary, fiscal and income

distribution policies, favorable international commodity

prices, and interest rate trends.


New taxes, better collecting efforts, and the recovery's

strong impact on revenues have allowed the government to

record primary fiscal surpluses in recent years. The 2006

federal primary surplus amounted to 3.5 percent of GDP, and

is estimated at 3.3 - 3.48 percent of GDP in 2007, although

this declined to roughly 2.3 - 2.5 percent of GDP when

excluding a one-time adjustment due to changes in

Argentina's pension regime). The government projects a

primary fiscal surplus of about 3.5 percent in 2008.


Argentina should continue to perform well, with the Central

Bank of Argentina's consensus survey forecasting 6.6

percent real GDP growth for 2008. A range of economic

experts have identified challenges to sustaining high

levels of economic growth in the future, including:

capacity constraints; the need for substantial new

investment in primary infrastructure; potential energy

shortages in the face of high growth and domestic energy

prices maintained by the government below international

market levels; increasing scarcity of highly skilled labor;

inflation (8.5 percent in 2007 according to official

statistics, but estimated by independent analysts to be

significantly higher) and the government's heterodox

policies to contain it, including pressure on the private

sector to limit price increases via ""price stabilization""

agreements; and delays addressing the post-crisis

renegotiation of public service contracts.


The industrial sector has performed well, growing from 16

percent of GDP in 2001 to 22.3 percent in 2006.

Illustrative of this industrial expansion, the domestic car

industry had its best year in history in 2007, with

production reaching 544,647 units, up 26% from 2006.

Automotive exports reached 316,410 units in 2007, also an

all-time record, and comprising about 58% of total

production. In 2007, the automotive industry accounted for

almost 20% of Argentina's manufacturing output and 36% of

all manufacturing exports, measured by value.


Argentina's economic expansion continues to create jobs,

and unemployment continues to decline, down from a 21.5

percent peak in 2002 to 8.8 percent during the third

quarter of 2007 according to official government

statistics. Investment in real terms, according to

consensus forecasts published by the Central Bank, was

estimated to have increased 13.8 percent in 2007.

Meanwhile, the move from convertibility to a managed float

exchange rate regime and high global commodity prices have

lifted the value of exports to record levels. A

substantial foreign exchange reserve cushion ($46 billion

as of December 2007) has also helped insulate the economy

from external shocks. In January 2006, the GOA used

reserves to pay down its $9.5 billion debt to the IMF.


Argentina's Central Bank has managed monetary and currency

policy in support of the economic expansion, maintaining an

undervalued or ""competitive"" exchange rate and negative

real interest rates. Such policies have contributed to

substantial inflationary pressures. To help control

inflation, the government largely froze key public utility

tariff rates since 2002 and, since 2005, has negotiated

price stabilization agreements on a sizeable basket of

essential consumer goods.


Private sector bank balance sheets, which deteriorated

significantly during the economic crisis, are recovering,

with improving levels of liquidity, net exposure to the

public sector significantly reduced, and credit - primarily

to the private sector - increasing at a faster pace than

nominal GDP growth. According to private rating agencies,

most private banks (which hold approximately 55 percent of

total financial system deposits and 67percent of loans)

have returned to solvency. The ratio of private bank non-

performing loans has fallen to an historic low of

approximately 2.5 percent, and profits for the overall

banking system are among the highest levels achieved in

over a decade. According to central bank regulatory

authorities, public banks, which hold the remaining assets,

are also solvent and liquid. However, system-wide, new

lending is mostly short-term, as access to long-term

financing is limited and borrowers are reluctant to borrow

long-term at variable rates. Uncertainty about the levels

of long-term inflation will continue to complicate GOA and

private sector efforts to develop a long-term fixed

interest rate market, without which it will be difficult to

deepen Argentina's financial markets or support large-scale

project finance. Government officials have acknowledged

the lack of medium- and long-term credit facilities needed

to support the expansion of domestic productive capacity

and, according to media reports, are considering whether

and how to structure a state-supported long-term financing

vehicle.


Decree 1853/1993 governs foreign investment in Argentina.

According to this decree, foreign companies may invest in

Argentina without registration or prior government

approval, and on the same terms as investors domiciled in

Argentina. Investors are free to enter Argentina through

merger, acquisition, greenfield investment, or joint

venture. Foreign firms may also participate in publicly

financed research and development programs on a national

treatment basis. In June 2003, Argentina enacted

legislation limiting foreign ownership of ""cultural goods,""

which includes media and Internet companies, to 30 percent.

An exception to the 30 percent limit is made for investors

from those countries whose foreign investment regimes allow

more than 30 percent foreign ownership of cultural goods.

This law also exempts media companies from ""cramdown"" (or a

bankruptcy court's enforcement of a reorganization plan

despite the objections of some creditors) rules in

restructuring and bankruptcy.


A Bilateral Investment Treaty (BIT) between Argentina and

the United States entered into force in October 1994. The

BIT provides protections against capital movement

restrictions, expropriations, and performance requirements;

it also establishes effective means for the settlement of

investment disputes. The BIT lists a few sectors in which

Argentina maintains exceptions to national treatment for

U.S. investors: real estate in border areas, air

transportation, shipbuilding, nuclear energy, uranium

mining, and fishing. U.S. investors must obtain permission

from the Ministry of Defense's Superintendency for

Frontiers to invest in non-mining activities in border

areas.


Foreign and Argentine firms face the same tax liabilities.

In general, taxes are assessed on consumption, imports and

exports, assets, financial transactions, and property and

payroll (social security and related benefits). In June

2003, Argentina announced that it would review more closely

the tax declarations of foreign corporations operating in

Argentina. The professed aim of this measure is to crack

down on the use of offshore shell corporations to shelter

profits and assets from taxation.


The GOA has established a number of investment promotion

programs. Those programs allow for VAT refunds and

accelerated depreciation of capital goods for investors

(although numerous investors have reported difficulties and

delays in obtaining expected VAT refunds); offer tariff

incentives for local production of capital goods; and

include sectoral programs, free trade zones, and a Special

Customs Area (SCA) in Tierra del Fuego, among other

benefits. A complete description of the scope and scale of

Argentina's investment promotion programs and regimes can

be found at http://www.industria.gov.ar and

http://www.prosperar.gov.ar. Information about programs

that specifically apply to small and medium businesses may

be found at http://www.sepyme.gov.ar.


According to the World Bank's latest ""Doing Business""

survey, Argentina in 2007 ranked 109 out of 178 nations and

territories surveyed in overall ""ease of doing business,""

down from 101 in 2006. The survey considered issues such

as: starting a business; dealing with licenses; employing

workers; registering property; getting credit; protecting

investors; paying taxes; trading across borders; enforcing

contracts; and closing a business.


--------------------------------

Conversion and Transfer Policies

--------------------------------


2. Until the end of 2001, Argentine law offered a number of

protections for free capital and currency transfers. Law

21382, Article 5 (as implemented by Decree 1853/1993)

allows foreign investors to repatriate capital and remit

earnings abroad at any time. Article V of the United

States-Argentina BIT also provides for free, prompt

transfers related to investments. In the wake of the 2001-

2002 crisis, however, the GOA instituted and subsequently

modified an array of emergency transfer and currency

conversion restrictions. The number of new regulations and

policy changes has generated considerable uncertainty for

investors.


The Argentine Ministry of Economy and the Central Bank have

issued various new or revised foreign exchange transaction

regulations in an attempt to normalize the foreign exchange

market and to limit the peso's appreciation. In nominal

terms, the Argentine peso depreciated 70 percent in 2002,

following the financial crisis that began in December 2001.

The peso subsequently appreciated 15 percent against the

USD in nominal terms in 2003, and slightly depreciated by

two percent in 2004, two percent in 2005, one percent in

2006, and three percent in 2007.


Argentina imposed limited capital controls in July 2003

through Decree 285/2003, which establishes a regime for

capital inflows and outflows. The decree obliges investors

to keep foreign currency inflows in the country for a

period of at least 180 days. In June 2005, the government

further tightened capital controls through Decree 616/2005.

The decree increased the minimum holding period for capital

inflows from 180 to 365 days and established that some

capital inflows are subject to a 30 percent unremunerated

reserve requirement to be deposited in a local bank for 365

days. This deposit must be denominated in U.S. dollars and

the proceeds cannot be used as collateral. The remaining

70 percent is free to be invested, but is subject to the

365-day minimum holding period. Capital inflows related to

trade transactions, foreign direct investment, or to

primary public offerings of stock or bonds (from both the

private and public sector) as well as inflows from

International Financial Institutions are exempt from

controls. Decree 616 diverged from previous regulation, as

it attempted to discourage capital inflows by increasing

the cost of bringing capital into the country.


A resident individual or company is allowed to purchase up

to USD 2 million per month of foreign currency without

Central Bank authorization. Any excess is subject to the

restrictions (e.g., 30 percent reserve requirement and 365-

day minimum investment period). In December 2006, the

Central Bank established that capital inflows and outflows

must be registered under a person's or business' name,

whereas in the past transactions could be registered

generically under the local brokerage/exchange house. There

are special rules regulating the purchase of foreign

currency to settle financial debt, and for the private

issuance of bonds denominated in foreign currency.


Decree 260/2002 lifted official conversion rates that had

been established in early 2002. With this decree, the

market determines the rate of exchange, with Central Bank

intervention, and subject to rules established by the

Central Bank. The Central Bank intervenes frequently in the

foreign exchange market, with the objective of maintaining

a competitive peso.


------------------------------

Expropriation and Compensation

------------------------------


3. Article 4 of the United States-Argentina BIT states that

investments shall not be expropriated or nationalized

except for public purpose upon payment of prompt fair-

market value compensation. However, some U.S. investors

claim the January 2002 pesification of dollar-denominated

contracts amounts to an effective expropriation of their

investments. A number of these investors have filed

international arbitration claims against the government of

Argentina (see Dispute Settlement Section).


------------------

Dispute Settlement

------------------


4. The GOA accepts the principle of international

arbitration. The United States-Argentina BIT provides for

binding international arbitration of investment disputes

that cannot be settled through amicable consultation and

negotiation between the parties. The Government of

Argentina is a party to the International Center for the

Settlement of Investment Disputes (ICSID), the United

Nations Commission on International Trade Law (UNCITRAL),

and the World Bank's Multilateral Investment Guarantee

Agency (MIGA). Companies that seek recourse through

Argentine courts, however, may not also pursue recourse

through international arbitration.


In April 2003, the GOA issued Decree 926/2003, which

created two new agencies to carry out negotiations under

bilateral investment treaties, including the United States-

Argentina BIT. The ""Amicable Negotiations Federal Council""

(ANFC) made up of representatives of the Ministry of

Foreign Affairs, the Ministry of Economy and the Federal

Treasury Attorney, had a mission to devise the government's

strategies and policies in negotiations with foreign

investors and could approve proposals made during

negotiations. However, in July 2003, that body was replaced

by the ""Unit for the Renegotiation and Analysis of Utility

Contracts"" (UNIREN), which was created to serve essentially

the same function, but which is presided over jointly by

the Ministers of Planning and Economy. The other entity

created by Decree 926/2003 is the ""Amicable Negotiations

Proceedings Body,"" which works under the Federal Treasury

Attorney. It receives investor complaints, gathers

information and carries out negotiations with foreign

investors.


In a December 2006 decision on the 2002 pesification

decree, the Supreme Court ordered banks to reimburse

depositors in local currency the total value of deposits

originally held in U.S. dollars that had earlier been

frozen. The decision also upheld the legality of this

pesification decree, which froze bank deposits and forcibly

converted dollar savings into devalued pesos. The ruling

ordered banks to compensate depositors at 3.08 pesos to the

dollar -- equal to the pesified deposits they would now

hold under the original decree, and applying a currency

conversion rate of 1.40 pesos per dollar, adjusting for

inflation and adding a four percent annual interest rate to

be applied retroactively since the pesification began.


Domestic investment dispute adjudication is available

through local courts or administrative procedures.

However, independent surveys indicate that public

confidence in the Argentine judiciary remains weak.

Therefore, many foreign investors rely on private or

international arbitration when those options are available.

Argentina has a strict bankruptcy law similar to that of

the United States. However, initiating bankruptcy

proceedings is more difficult in Argentina, and there have

been allegations of corruption in the administration of

bankruptcies and the selection of bankruptcy trustees.

Creditors can participate in a Chapter 11-like procedure to

determine the best means of recovering debts from a

bankrupt firm. Company directors are personally and

criminally responsible in cases of fraud, although severe

punishment for white-collar crime is rare.


A number of U.S. investors have filed ICSID arbitration

claims against the government of Argentina. Most of these

investors consider the January 2002 pesification of dollar-

denominated contracts, and/or the ex post facto prohibition

on contracts linked to foreign inflation indices, to be an

effective expropriation of their investments. Prior to

pesification, some U.S. investors engaged in disputes with

provincial governments over unforeseen changes in tax laws

and liabilities (often in spite of tax-stability guarantees

from provincial and federal authorities). Customs

treatment and the freeze on public utility rate changes

have also provoked investment disagreements. There were 33

pending cases involving Argentina before the ICSID tribunal

as of mid-December 2007, 32 percent of total pending ICSID

cases, with total claims of over USD 13 billion. Fourteen

of these pending ICSID cases have been filed under the U.S.

BIT. Over the past three years, several ICSID claimants

who represent a substantial share of total claims against

Argentina have suspended their ICSID proceedings to

facilitate further negotiation with the government. A

number of the pending cases are reaching their final

conclusion and, in one case, a final judgment of over $100

million against Argentina has been upheld. Government

payment to the U.S. claimant under this ICSID final award

remains pending.


----------------------------------

Performance Requirements/Incentives

----------------------------------


5. No performance requirements are aimed specifically at

foreign investors. Government incentives apply to both

foreign and domestic firms. The Ministry of Economy

administers a complex trade-balancing regime involving

quotas and tariffs for auto manufacturers including

minimum-content and other requirements. Special regimes

also apply to mining, oil and gas, and other natural

resource sectors. The special regimes allow producers to

keep all (as in the case of mining) or 70 percent of their

foreign exchange revenues off-shore (as in the case of oil

and gas).


----------------------------------------

Right to Private Ownership and Establishment

----------------------------------------


6. Foreign and domestic investors have free and equal

rights to establish and own businesses, or to acquire and

dispose of interests in businesses without discrimination.

However, as noted above, in June 2003 Argentina enacted

legislation limiting foreign ownership of ""cultural goods,""

which includes media and Internet service providers

companies, to 30 percent. An exception to the 30 percent

limit is made for investors from those countries whose

foreign investment regimes allow more than 30 percent

foreign ownership of cultural goods.


-----------------------------

Protection of Property Rights

-----------------------------


7. Secured interests in property, including mortgages, are

recognized and common in Argentina. Such interests can be

easily and effectively registered. They also can be

readily bought and sold. However, in February 2002, the

government of Argentina established an extended moratorium

prohibiting financial institutions from foreclosing on

delinquent mortgages on primary residences and implemented

a special procedure for both parties to reach an agreement

for repaying the mortgage. This special procedure is only

applied when delinquency in payment occurred from January

2001 to September 2003.


The government of Argentina adheres to most treaties and

international agreements on intellectual property and

belongs to the World Intellectual Property Organization and

the World Trade Organization (WTO). The Argentine Congress

ratified the Uruguay Round agreements, including the

provisions on intellectual property, in Law 24425 on

January 5, 1995. However, enforcement of intellectual

property rights is problematic in Argentina. Argentina has

been on the Office of the U.S. Trade Representative's

intellectual property rights ""Priority Watch List"" since

1996.


Patents: Patent protection is an ongoing problem in

Argentina's intellectual property rights regime, and

extension of adequate patent protection to pharmaceuticals

has been a highly contentious bilateral issue. In April

2002, the United States and Argentina reached an agreement

with respect to most of the claims in a World Trade

Organization (WTO) dispute brought by the United States

with respect to Argentina's implementation of its TRIPS

obligations. Two issues, including the critical issue of

data protection, remain unresolved. The United States and

Argentina have agreed to leave these issues within the WTO

dispute settlement mechanism for action. New patent

legislation implementing part of the April 2002 agreement

was passed in December 2003. However, some U.S. and

European pharmaceutical firms are concerned that provisions

in the legislation, in practice, undercut their ability to

protect patented products through judicial injunctions.


Copyrights, Trademarks, Trade Secrets, and Semiconductor

Chip Layout Design


Despite the fact that Argentina's copyright law dates to

1930, it provides a generally good legal framework to

protect intellectual property such as books, films, music,

and software. However, the economic crisis of 2002 led to

an increase in the use of unlicensed software and optical

media. Piracy rates of CDs, DVDs, and software are

estimated at over 60 percent. Enforcement continues to be

sporadic and pirated products are widely available in the

market. That said, Argentine authorities began in late 2004

to show signs of a more proactive posture regarding product

piracy. Specifically, the government of Argentina passed

laws designed to allow authorities to mount undercover

operations for the first time; to electronically flag

suspect shipments; to facilitate the seizure and detention

of suspect merchandise; and to more frequently rotate

customs personnel, among other provisions. A January 2005

law which allowed Customs officials to seize shipments

which violate IP rights - and detain them based on the

presumption of IP violations, pending a formal decision -

has not been implemented. The government has also improved

the process for trademark registration, decreasing the time

needed and increasing the rate at which trademarks are

registered. However, the trademark law, passed in 1980,

provides what are widely considered to be non-deterrent

civil damages, and in criminal cases the judiciary is

reluctant to impose deterrent penalties such as prison

sentences. Argentina has no specific law on trade secrets,

although penalties for unauthorized revelation of secrets

are applied to a limited degree under commercial law.

Argentina has signed the WIPO Treaty on Integrated

Circuits, but has no law dealing specifically with the

protection of layout designs and semiconductors.


-------------------------------------

Transparency of the Regulatory System

-------------------------------------


8. During the 1990s, the GOA eliminated virtually all

restrictions on domestic and foreign trade of goods and

services, as well as on financial markets. These policies

increased competition in many industries and sectors.

Argentine authorities, including the Ministry of Economy

and a number of quasi-independent regulatory entities, have

also generally acted to foster competition and protect

consumers, though not always in a transparent fashion.


Frequent changes to the bankruptcy law during early 2002

increased creditor insecurity. In January 2002, the

Argentine National Congress passed several amendments to

the bankruptcy law that increased debtors' powers

considerably, but the National Congress restored many of

the law's arlier protections for creditors in May of that

year.


Other regulatory changes in 2002 added to creditor

insecurity. The GOA announced in May 2002 that an

emergency decree passed in late 2001 had voided the

presidential decree that authorized oil and gas companies

to keep 70 percent of their foreign exchange revenues

offshore. This decree formed the financial basis for most

foreign investment in the Argentine oil sector. The GOA's

discovery that the decree had been voided inadvertently

months before came at a time when it was worried about its

access to foreign exchange and the devaluation of the peso.

When the peso began to appreciate in late 2002/early 2003,

the government of Argentina issued a new decree that gave

the industry the same right to withhold 70 percent of

revenues starting January 1, 2003, but the industry remains

liable for failing to repatriate 100 percent of its

revenues during the 13-month period from December 2001 and

December 2002. The Central Bank opened proceedings against

some oil and gas producers in 2004 for alleged criminal

breach of the exchange regime. According to the Central

Bank, as of December 2007, one judgment in these cases has

been rendered in favor of the involved company. Remaining

cases are still pending.


The GOA's actions since 2003 have not calmed investor

concerns about the regulatory environment. The GOA issued

a decree depesifying foreign currency-denominated contracts

of foreign firms doing business in Argentina in 2003, but

then withdrew the decree and said it was a mistake. In the

energy sector, the GOA took measures to avoid energy

shortages that arose from the increase in demand for

natural gas and electricity in 2004, including ordering

reductions in natural gas exports to Chile and electricity

exports to Uruguay; importing natural gas from Bolivia and

electricity from Brazil; raising tariffs for industrial

users; providing incentives to small users to save energy;

and intervening in the wholesale markets for natural gas

and electricity.


The GOA has also encouraged companies to invest in the

expansion of natural gas pipelines, and has encouraged

power companies to invest compensation owed them by the GOA

in new power generation plants. There is concern that the

aforementioned GOA actions in the energy sector, coupled

with the GOA's efforts to control retail prices of fuels,

have created disincentives for companies to invest in

energy exploration and infrastructure. Inadequate

investment in those areas could, in turn, result in energy

supplies not keeping pace with demand generated by

Argentina's rapid economic growth.


In response to significant energy shortages during

Argentina's July/August 2007 winter season, the GOA

mandated several weeks of cutbacks in electricity and gas

consumption by major wholesale consumers. This action

caused a slight decrease in industrial production, rolling

blackouts in major urban areas, and cutbacks in the

availability of compressed natural gas used by many

automobiles and most taxis. In December 2007, President

Cristina Fernandez de Kirchner announced a National Energy

Saving Plan with measures that include seasonal time

changes, regulation of energy use in public buildings and

incentives for consumers to adopt more energy-efficient

home appliances.


In November 2007, the GOA moved to end export tax

exemptions for several mining companies, and imposed a

federal levy on mineral exports, ranging from five percent

to ten percent. A number of industry participants have

characterized the action as a significant departure from

Argentina's 1993-era mining law, which guaranteed tax

stability for 30 years, and several are seeking redress

through the courts. The new system is sill being

implemented as of the drafting of this report.


In general, national taxation rules do not discriminate

against foreigners or foreign firms (e.g., asset taxes are

applied to equity possessed by both domestic and foreign

entities). Nevertheless, a number of these taxes may impact

their investment decisions. As noted above, in June 2003,

the government of Argentina announced that it would review

more closely the tax declarations of foreign corporations

operating in Argentina. The professed aim of this measure

is to crack down on the use of offshore shell corporations

to shelter profits and assets from taxation.


At the national level, there are four major taxes: value-

added tax (VAT), income tax, export taxes, and a financial

transactions tax. The income tax is assessed on income

earned by companies, at a rate of 35 percent, and on

individuals at a rate ranging from 9 percent to 35 percent.

The income tax law presumes that every company earns a

profit, and based on this presumption, all firms are

required to pay one percent of the value of their assets

involved in the production process to the state. If a

company is later able to establish that it did not earn a

profit, the company will be reimbursed within five years.

Export taxes are tariffs imposed on the export of goods,

with rates from five percent to 45 percent. The financial

transactions tax imposes a 1.2 percent on checking and

savings account transaction within the national banking

system. The VAT is set at 21 percent for most products.

The VAT is 10.5 percent for interest and commissions on

debts taken by public transportation companies, fruits,

vegetables, honey, newspapers and magazines, and some

capital goods. The VAT is 27 percent for natural gas,

electricity, water, and sewage services. Exporters are

entitled to receive VAT rebates, but many companies report

that have experienced extensive delays in their receipt of

the rebates.


At the provincial level, the system of provincial sales

taxes has encouraged vertical integration of firms.

Investors also have expressed increasing concern over the

incidence of municipal ""supply taxes."" The Argentine

constitution gives municipalities the right to set fees for

the services that they provide, including supply fees.

Many investors allege that the supply fees charged by

municipalities do not correspond to the services provided.

Municipalities have levied fees on the food industry, in

particular, through a range of sanitary controls that

occasionally overlap national and provincial regulations.

Supply tax fees have affected other industries as well.

Municipalities in Buenos Aires and Cordoba provinces have

generated the most serious complaints. Many municipalities

have begun imposing fees on any advertising visible from

the public street, including in-store promotion materials,

such as soft drink coolers, ashtrays, and the packaging of

individual consumer items, such as batteries.


------------------------------------------

Efficient Capital Markets and Portfolio Investment

------------------------------------------


9. Law 17811 of 1968 regulates public securities offerings.

The Argentine Securities and Exchange Commission (Comision

Nacional de Valores) is the federal agency that regulates

securities markets offerings. Securities and accounting

standards are transparent and consistent with international

norms.


U.S. banks, securities firms, and investment funds are well

represented in Argentina and are dynamic players in the

local capital markets. In July 2003, the government began

requiring foreign banks to disclose to the public the

nature and extent to which their foreign parent banks

guarantee their branches or subsidiaries in Argentina. The

private pension fund system -- consolidated in 1995 --

provided a growing base for capital markets until the 2001-

2002 economic and financial crises. Following the

government's 2005 debt restructuring, private pension funds

have again become significant players in domestic capital

markets.


In October 2007, the government introduced new regulations

requiring the private pension funds (the AFJPs) to

gradually reduce their investments in Mercosur countries

(the majority of which are in Brazilian financial assets)

in a move apparently designed to increase the liquidity and

depth of domestic capital markets. According to previous

rules governing investments, AFJPs could invest ten percent

of their portfolios in foreign assets. However,

investments in Mercosur countries were excluded from this

ten percent limit, meaning that AFJPs could account for

them as domestic assets. To preclude sudden large foreign

exchange inflows, the government resolution calls for the

gradual reduction of Mercosur investments, beginning with a

cap of eight percent of total assets in December 2007,

falling to six percent in April 2008, four percent in

August 2008, and ending at two percent in December 2008.

By December 2008, returned funds should total about 8

billion pesos (roughly $2.5 billion), according to local

analysts.


------------------

Political Violence

------------------


10. Since the 2001/2 economic crisis, protests, marches,

and roadblocks directed at the national, provincial and

municipal governments, as well as some multinational

companies, have been commonplace in Argentina, but their

number, size, and the likelihood of accompanying violence

have decreased since the crisis. There have been no cases

of overtly political violence since the April 2003 national

presidential election. In 2005, there were approximately

20 incidents in which local groups were involved in

bombings, attempted bombings, or arson, mostly against U.S.

businesses (Citibank, Bank Boston, Blockbuster, and

McDonald's in particular). Anti-American pamphlets or

graffiti were found at most of the 2005 incidents, none of

which resulted in injury or death. Since these 2005

incidents, no other such events have occurred.


In protest against the construction, and the October 2007

completion, of a $1.2 billion pulp mill on the Uruguayan

side of a river that defines the Argentine/Uruguay border,

Argentine citizens have since December 2006 completely

blocked one of three bridges that connects the two nations,

and periodically blocked the other two bridges that connect

them. The pulp mill project is being financed and insured

by World Bank agencies and has met all relevant World Bank

environmental safeguards. The Mercosur trade bloc's

arbitral tribunal considered the case in 2006 and found the

blockade illegal and a violation of the right of free

transit of goods and services in the region, but imposed no

sanctions (and lacks enforcement authority). The

Governments of Argentina and Uruguay have asked the

International Court of Justice for an opinion on whether

construction of the plant violated a 1975 Argentine-

Uruguayan treaty dealing with its shared river, and a

decision is expected in 2008.


----------

Corruption

----------


11. Government corruption and private sector business fraud

are the subjects of frequent complaints from U.S.

investors. U.S. businesses have identified corruption in

Argentina as a significant problem for trade and

investment, particularly in procurement, regulatory

systems, tax collection, and health care administration.

Some foreign firms also complain that their adherence to

the letter of the tax and regulatory codes places them at a

competitive disadvantage.


Transparency International (TI) has a local chapter in

Argentina. In the latest TI Corruption Perceptions Index

(CPI) that ranks countries and territories by their

perceived levels of corruption, Argentina ranked 105 out of

180 countries and territories, below the average among

Latin American countries, and far behind neighbors Chile

and Uruguay. Such surveys have contributed to more open

debate in Argentina about corruption and fraud. There are

indications that the GOA is trying to change the culture of

tax evasion by stepping up enforcement efforts and

encouraging the use of credit card purchases while at the

same time using the media to increase public awareness of

tax obligations and to shame evaders. While Argentina's

growing economy is primarily responsible for the government

of Argentina's solid fiscal performance, anti-evasion

efforts were a factor in the federal government's record

tax collections of about 200 billion pesos in 2007, up from

around 163 billion in 2006 and 150 billion in 2005.


In 2007, a major corruption investigation involving alleged

bribe payments by employees of a foreign multinational

corporation to government authorities has been widely

reported in the press. The ensuing investigation has

reportedly significantly delayed a planned expansion of

Argentina's natural gas pipeline network. Also in 2007, a

federal congressman denounced an attempt by a foreign

multinational to pay a bribe in exchange for supporting

legislation favorable to the company's future business.

Media reports that the Foreign Ministry plans to take this

case to the OECD Anti-Corruption Committee.


Argentina is a party to the OAS Anti-Corruption Convention

and ratified the OECD Anti-Corruption Convention in 2001.

Argentina has signed and ratified the UN Convention Against

Corruption (UNCAC). It is an active participant in UNCAC's

Conference of State Parties and is participating in the

pilot review of the implementation of UNCAC. It is also an

active participant in the Mechanism for Follow-up on the

Implementation of the Inter-American Convention Against

Corruption (MESICIC). The government has regulations

against bribery of government officials, but enforcement is

uncertain. An anti-corruption office under the Ministry of

Justice reviews the financial disclosure statements that

are now required of all senior public officials. The Anti-

Corruption Office (ACO) also carries out investigations

into cases of alleged corruption involving Executive branch

officials or in matters involving federal funds, except for

funds transferred to the provinces. Although nominally a

part of the judicial branch, the ACO does not have

authority to independently prosecute cases, but can refer

cases to other agencies or serve as the plaintiff and

request a judge to initiate a case. The majority of high-

profile corruption cases, however, are investigated by

individual judges. These judges, however, may request

assistance from the ACO in gathering or analyzing evidence,

especially when related to complicated financial

transactions.


A recent ACO investigation of GOA public purchases between

2002 and 2005 revealed that about 75 percent were

accomplished via direct contracts, often with a sole

provider, and not via public tenders. The ACO report

expressed concern that this process can facilitate

corruption and does not allow competition among providers.

The ACO report noted that some GOA officials defended this

practice, claiming that many contracts were below the

legally-mandated limit of 10,000 pesos (about USD 3200),

under which tenders are not required. GOA officials also

claimed that sometimes only one provider was able to meet

contract specifications. In response, the ACO report noted

that GOA officials often avoided the 10 thousand peso limit

by disaggregating contract components so that no part

exceeded this limit, that contract specifications were

sometimes written so that only one provider could meet the

requirement, or failed to widely advertise tenders so that

other providers could be made aware of them.


Inefficiencies in the Argentine judicial system slow

efforts to stem corruption. Argentine laws do not provide

for plea-bargaining, so many corruption charges are

difficult to prosecute. As a result, convictions are rare.


-------------------------------

Bilateral Investment Agreements

-------------------------------


12. The governments of Argentina and the United States

signed a BIT in 1991. The agreement was amended, ratified

by the Congresses of both countries, and entered into force

on October 20, 1994. The Argentina-United States BIT can

be found on the following site:

http://www.state.gov/documents/organization/4 3475.pdf.htm.

Argentina does not have a bilateral tax treaty (Treaty for

the Mutual Avoidance of Double Taxation) with the United

States.


At present, the GOA has signed and ratified bilateral

treaties for the protection and promotion of investment

with all of its major trade and investment partners. More

information regarding Argentina's bilateral tax and

investment treaties is available at www.infoleg.gov.ar.


Argentina has valid double taxation treaties with the

following countries: Australia, United Kingdom, Denmark,

Germany, Belgium, Austria, France, Italy, Sweden,

Switzerland, Spain, Canada, Chile, Bolivia, Brazil,

Finland, Norway, and the Netherlands. In addition, a

number of treaties concerning the exemption of income from

international transport are in force.


-----------------------------------------

OPIC and other investment insurance programs

-----------------------------------------


13. The government of Argentina signed a comprehensive

agreement with the Overseas Private Investment Corporation

(OPIC) in 1989. The agreement allows OPIC to insure U.S.

investments against risks resulting from expropriation,

inconvertibility, war or other conflicts affecting public

order. OPIC programs are currently used in Argentina.

Argentina is also a member of the World Bank's Multilateral

Investment Guarantee Agency (MIGA).


-----

Labor

-----


14. Argentine workers are among the most highly educated in

Latin America. Argentine workers were relatively well paid

by international standards prior to the peso devaluation in

January 2002. While high inflation following the 2002

devaluation significantly eroded the purchasing power of

wages, sustained government-promoted increases in public

and private sector nominal wage levels from 2003 have

reversed this trend. Wages in dollar terms remain

competitive, even taking into account Argentina's

relatively high social security charges and other taxes.

As of the third quarter of 2007, the official unemployment

rate was 8.1 percent, down from a 21.5 percent peak in

2002, but this number excludes recipients of government

assistance to unemployed heads of households. If those

recipients were included, unemployment would be

approximately 8.8 percent. According to the Ministry of

Labor, about 44 percent of workers 14 years and older work

in the informal sector.


Organized labor continues to play a strong role in

Argentina. Sector-specific negotiations between unions and

industry, although largely market-driven, have often been

influenced by government suasion on behalf of unions. In

the 2002-2004 period, a number of general wage increases

were mandated by presidential decree.


Argentine law provides unions with the right to negotiate

collective bargaining agreements and to have recourse to

conciliation and arbitration. The Ministry of Labor,

Employment, and Social Security ratifies collective

bargaining agreements, which covered roughly 75 percent of

the formally employed work force. According to the ILO,

the ratification process impeded free collective bargaining

because the ministry considered not only whether a

collective labor agreement contained clauses violating

public order standards but also whether the agreement

complied with productivity, investment, technology, and

vocational training criteria. However, there were no known

cases during the year of government refusal to approve any

collective agreements under these criteria. There are no

special laws or exemptions from regular labor laws in the

foreign trade zones.


With the unemployment rate now below nine percent, numerous

employers continue to comment on an increasing shortage of

skilled labor. The GOA passed a modest labor reform law in

2000 to address rigidities in the labor market (i.e.,

increasing collective bargaining flexibility, extending

trial employment periods, and lowering payroll taxes for

new permanent hires). However, the anticipated growth in

employment did not materialize, as the reforms coincided

with a deepening of the economic recession produced by

foreign and domestic factors. Following the acceleration

of the financial crisis beginning in December 2001, many

workers left the formal labor force and instead began to

work informally, as employers sought to avoid high pension,

social security, and other taxes on formal employment. In

an effort to avoid massive layoffs during the 2002

financial crisis, severance payments were doubled. This

""double indemnification"" labor termination policy was ended

in September 2007 when official unemployment dropped below

ten percent. According to the World Bank's ""Doing

Business"" survey compiled before this double

indemnification policy was ended, the cost of terminating

an employee in Argentina averaged 139 weeks of wages,

almost double the Latin American average of 59 and more

than four times the OECD average of 31.


------------------------------

Foreign Trade Zones/Free Ports

------------------------------


15. Argentina has two types of tax-exempt trading areas:

Foreign Trade Zones (FTZs), which are found throughout the

country; and the more comprehensive Special Customs Area

(SCA), which covers all of Tierra del Fuego Province and

whose benefits apply only to already established firms.


Law 24331 of 1994 establishes the FTZ regime for Argentina.

Argentine law defines an FTZ as a territory outside the

""general customs area"" (GCA, i.e., the rest of Argentina)

where neither the inflows nor outflows of exported final

merchandise are subject to tariffs, non-tariff barriers, or

other taxes on goods. Goods produced within a FTZ

generally cannot be shipped to the GCA, unless they are

capital goods not produced in the rest of the country. The

labor, sanitary, ecological, safety, criminal, and

financial regulations within FTZs are the same as those

that prevail in the GCA. Foreign firms get national

treatment in FTZs.


Under the current law, the Executive Power may create one

FTZ per province, with certain exceptions. More than one

FTZ per province may be allowed in sparsely populated

border regions (although this provision has not been fully

utilized). Thus far, the National Executive Power has

permitted FTZs in most of the 24 Argentine provinces. The

most active FTZ is in La Plata, the capital of Buenos Aires

Province.


Merchandise shipped from the GCA to a FTZ may receive

export incentive benefits, if applicable, only after the

goods are exported from the FTZ to a third country

destination. Merchandise shipped from the GCA to a FTZ and

later exported to another country is not exempt from export

taxes. Any value added in FTZs and re-exports from FTZ is

exempt from export taxes.


Law 19640, passed in 1972, codifies the Special Customs

Area (SCA) rules for Argentina. Unlike FTZ-manufactured

goods, products manufactured in an SCA may enter the GCA

free from taxes or tariffs. In addition, the government

may enact special regulations that exempt products shipped

through an SCA (but not manufactured therein) from all

forms of taxation except excise taxes. The SCA program

provides benefits for established companies that meet

specific production and employment objectives.


The SCA program applies only to Tierra del Fuego Province.

The government reduced some SCA benefits in the early

1990s. Some of these benefits were later reestablished,

but only for those firms previously established in Tierra

del Fuego Province. The SCA program is scheduled to expire

at the end of 2013. In late 2006, Economic Ministry

Resolution 776 abolished export tax exemption enjoyed by

oil companies operating in Tierra del Fuego Province.


------------------------------------

Foreign Direct Investment Statistics

------------------------------------


16. According to the United Nations Conference on Trade and

Development (UNCTAD) World Investment Report 2007, the

total stock of FDI in Argentina at the end of 2006 was

estimated at $58.6 billion. Spain, the United States, and

France remain the top three investors. Other important

sources of investment capitalinclude Brazil, Canada,

Mexico, U.K., Italy, Chile, the Netherlands and Germany.


Also according to UNCTAD, Argentina received 1.3 percent of

foreign direct investment (FDI) inflows to developing

countries, and 5.7 percent of FDI inflows to Latin America

and the Caribbean in 2006. Both of these shares are well

below Argentina's average FDI share from the pre-crisis

1992-2000 period. Total FDI inflows in 2006 were estimated

at $4.8 billion. The stock of U.S. FDI in Argentina in

2006 was estimated at $13 billion. U.S. investment is

concentrated in financial services, agribusiness, energy,

petrochemicals, food processing, household products, and

motor vehicle manufacturing. Many U.S. firms substantially

wrote down the value of their Argentine investments in

response to the devaluation and pesification of previously

dollar-denominated contracts.


Argentine firms increasingly invested abroad during the

1990s (particularly in Brazil, Paraguay and Uruguay),

although the country has remained a net recipient of

foreign direct investment. In 2006, according to UNCTAD,

its outward FDI amounted to $2.0 billion.


The Argentine Ministry of Economy (http://www.mecon.gov.ar)

and the Investor's Information Service for Argentina

(http://www.infoarg.org) have additional detailed

information on foreign direct investment in Argentina.


KELLY


=======================CABLE ENDS============================

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