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Cablegate: Peru - Investment Climate Statement 2010

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DE RUEHPE #0172/01 0262145
ZNR UUUUU ZZH
R 262144Z JAN 10
FM AMEMBASSY LIMA
TO RUEHC/SECSTATE WASHDC 0592
INFO RUEHPE/AMEMBASSY LIMA

UNCLAS LIMA 000172

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PASS TO DEPARTMENT OF STATE - OFFICE OF INVESTMENT AFFAIRS (EB/IFD/OIA),
USDOC WASHDC, AND CIMS NTDB WASHDC

E.O. 12958: N/A
TAGS: ECON EINV EFIN ETRD ELAB KTDB PGOV USTR OPIC PE
SUBJECT: Peru - Investment Climate Statement 2010

REF: 09 STATE 00124006

1. In response to reftel, Embassy Lima submits the following 2010
Investment Climate Statement.


Openness to Foreign Investment

2. The Peruvian government seeks to attract investment -- both
foreign and domestic -- in nearly all sectors of the economy. The
U.S.-Peru Trade Promotion Agreement (PTPA), signed by President
Bush and President Garcia on December 14, 2007 and entered into
force on February 1, 2009, enables Peru to attract additional
investment by clarifying rules for investors, increasing
transparency, reducing barriers to trade, establishing faster
customs procedures, and improving the dispute settlement process.
The U.S. Congress extended unilateral trade preferences under the
Andean Trade Preferences Act (modified by the Andean Trade
Preferences and Drug Eradication Act, or ATPDEA) to Peru to
December 31, 2010. The U.S. Government recognized Peru's progress
in economic policy and other issues by selecting Peru for the
Millennium Challenge Account's Threshold Program for fiscal year
2007. The program launched in 2008 and Peru has just completed its
first year.

3. During the early 1990s, the Peruvian government promoted
economic stabilization and liberalization policies by lowering
trade barriers, lifting restrictions on capital flows and opening
the economy to foreign investors. Peru experienced marked growth
in foreign investment from 1993-1998. Economic reform and
privatization slowed in the late 1990s however, leading to a
discernible drop in direct and indirect foreign investment flows.
Investment remained stagnant following the collapse of President
Alberto Fujimori's government in November 2000, and through the
period of an interim government and the election of President
Alejandro Toledo in 2001.

4. During his tenure, President Toledo implemented several
pro-investment policies. In April 2002, the government renamed
COPRI, the privatization agency created in 1991, as ProInversion.
ProInversion sought to be a "one-stop shop" for current and
potential investors. Proinversion has successfully completed both
concessions and privatizations of state-owned enterprises and
natural resource based industries. ProInversion's current focus is
on concessions. In 2004, Las Bambas, a copper deposit, was
concessioned to Xstrata AG, a Swiss company, for US$121 million.
In 2005, Bayovar, a state-owned phosphate rock deposit, was given
in concession to a Brazilian company for a 3 percent royalty, and
ProInversion granted British-owned Rio Tinto a concession for the
La Granja copper deposit for US$22 million. Additionally, in 2006,
the oil and gas leasing agency Perupetro granted 16 exploration
concessions to foreign oil companies, including 9 to 5 U.S.
companies, along the northern coast and in the jungle. An
additional 24 contract leases were signed to foreign oil firms in
2007 (10 to U.S. companies) and 20 leases were approved (pending
signing) in 2008 (4 to U.S. companies). Implementation of the 2008
block awards had been delayed by allegations of corruption
involving a certain bidder and Peruvian officials. Approximately
20 additional exploration blocks are expected to be concessioned in
2010.

5. In addition to the 1993 Constitution (enacted January 1, 1994)
major laws concerning foreign direct investment in Peru include the
Foreign Investment Promotion Law (Legislative Decree (DL) 662 of
September 1991) which incorporates Legal Stability Agreements and
the Framework Law for Private Investment Growth (DL 757 of November
1991). The two 1991 laws were implemented by Supreme Decree
162-92-EF (October 1992). Other important laws are the Private
Investment in State-Owned Enterprises Promotion Law (DL 674), the
Private Investment in Public Services Infrastructure Promotion Law
(DL 758), and specific laws related to agriculture, fisheries and
aquaculture, forestry, mining; oil and gas, and electricity, which
are among the industries capable of receiving major FDI amounts in
Peru. The Government of Peru has undertaken a decentralization
process. The Base Law for Decentralization (DL27783 issued in
2002), the Organic Law on Regional Governments (DL27867), and the
Organic Law of Municipalities (DL27972) facilitate and promote
direct private investment with regional and local governments. Law
N???? 28059, Framework Law for the Promotion of Decentralized
Investment and its regulations approved through Supreme Decree N????

015-2004-PCM, sets forth the regulatory framework so that the
State, at its three government levels (national, regional and
local), may promote decentralized investment. The Government of
Peru provides a link to these laws, the 1993 Constitution, and a
listing of the Basic Rights of Foreign Investors on the
Proinversion website.

6. The 1993 Constitution guarantees national treatment for foreign
investors and permits foreign investment in almost all economic
sectors. Article 6 under Supreme Decree N???? 162-92-EF authorizes
foreign investors to carry out any economic activity of their
choice to the extent this activity is not defined by the law as a
crime and provided they comply with all constitutional precepts,
laws and treaties. However, a few exceptions exist. For example,
the law excludes from foreign investment activities in reserved
natural protected areas and manufacturing of war weapons, pursuant
to Article 6 of Legislative Decree N???? 757. The law reserves
participation in the media, air and land transportation, and
private security and surveillance exclusively to Peruvian investors
or require a majority share of Peruvian investors. Prior approval
is required in the banking (for regulatory reasons, and also
applies to domestic investment) and defense-related sectors.
Foreigners are legally forbidden from owning a majority interest in
radio and television stations in Peru; nevertheless, foreigners
have in practice owned controlling interests in such companies.
Under the Constitution, foreign interests cannot "acquire or
possess under any title, mines, lands, forests, waters, or fuel or
energy sources" within 50 kilometers of Peru's international
borders. However, foreigners can obtain concessions and rights
within the restricted areas with the authorization of a supreme
resolution approved by the Cabinet and the Joint Command of the
Armed Forces.

7. In December 2008, the Government of Peru issued two important
decrees aimed to prevent an economic slowdown in Peru caused by the
global economic crisis by creating investment projects. The first
one outlines the regulations for public and private investment
ventures. The second one presents a priority list of projects for
the public-private partnerships. Among these are major ports
(Paita, San Martin, Pisco, Salaverry, Pucallpa, Iquitos,
Yurimaguas) as well as some regional airport projects, a South
American Integrated Regional Infrastructure Project (IIRSA) Center,
water treatment and agricultural projects (Majes-Siguas and
Chavimochic). As of November 2009, a number of these projects have
been awarded, such as the port in San Martin and water treatment
project in Majes-Siguas.

8. Under the 1993 Constitution, foreign investors have the same
rights as national investors to benefit from any investment
incentives, such as tax exemptions. The PTPA establishes a secure,
predictable legal framework for U.S. investors operating in Peru.
All forms of investment are protected under the PTPA. U.S.
investors will enjoy in almost all circumstances the right to
establish, acquire and operate investments in Peru on an equal
footing with local investors.

9. Peru has improved its rankings on corruption, economic freedom,
and ease of doing business. Peru remains in the MCC Threshold
Program.

Transparency International Corruption Perceptions Index:

75

Heritage Index of Economic Freedom:

57

World Bank Ease of Doing Business Rank:

56

MCC Government Effectiveness:

40%

MCC Rule of Law:

23%

MCC Control of Corruption:

60%

MCC Fiscal Policy:

79%

MCC Trade Policy:

71%

MCC Regulatory Quality:

83%

MCC Business Start Up

31%

MCC Land Rights Access

65%

MCC Natural Resource Management

57%

MCC indicators are a percentile ranking in the country's peer
group. (0% is worst, 50% is median, and 100% is best)


Conversion and Transfer Policies

10. Under Article 64 of the 1993 Constitution, the Peruvian
government guarantees the freedom to hold and dispose of foreign
currency; hence, there are no foreign exchange controls in Peru.
All restrictions on remittances of profits, dividends, royalties,
and capital have been eliminated, although foreign investors are
advised to register their investments with ProInversion to ensure
these guarantees. Exporters and importers are not required to
channel foreign exchange transactions through the Central Reserve
Bank of Peru, and can conduct transactions freely on the open
market. Anyone may open and maintain foreign currency accounts in
Peruvian commercial banks. U.S. firms have reported no problems or
delays in transferring funds or remitting capital, earnings, loan
repayments or lease payments since Peru's economic reforms of the
early 1990s.

11. The 1993 Constitution guarantees free convertibility of
currency. There is, however, a legal limit on the amount that
private pension fund managers can invest in foreign securities.
Between May 2004 and April 2008, the Central Reserve Bank of Peru
(BCR) gradually increased this limit from 9 percent to 20 percent.
In October 2009, the BCR increased the limit to its current rate of
22 percent. Under the PTPA, portfolio managers in the U.S. are
able to provide portfolio management services to both mutual funds
and pension funds in Peru, including to funds that manage Peru's
privatized social security accounts.

12. The BCR is an independent institution, free to manage monetary
policy to maintain financial stability. The BCR's primary goal is
to maintain price stability, via inflation targeting. Inflation at
year-end in Peru was 3.9 percent in 2007, 6.7 percent in 2008, and
0.3 percent in 2009. The government has also implemented policies
to de-dollarize the economy. Dollars accounted for about 52% of
loans and approximately 56% of deposits as of January 2010


Expropriation and Compensation

13. According to the Constitution, the Peruvian government can only
expropriate private property on public interest grounds (such as
for public works projects) or for national security. Any
expropriation requires the Congress to pass a specific act. The
Government of Peru has expressed its intention to comply with
international standards concerning expropriations.


Dispute Settlement

14. Dispute settlement continues to be problematic in Peru,
although the GOP took steps in 2005 to improve the dispute
settlement process. From December 2004 through 2006, the GOP
established 24 commercial courts in Lima to rule on investment
disputes, including two courts of appeal. The commercial courts
have substantially improved the process for commercial disputes.
Prior to the existence of the commercial courts, it took an average
of two years to resolve a commercial case through the civil court
system. These new courts, which have specialized judges, have
reduced the amount of time to resolve a case to two months.
Additionally, the enforcement of court decisions has been reduced
from 36 months to 3-6 months. While about 40 percent of decisions
are appealed, most of these are resolved at the appeals level; very
few are appealed to the Supreme Court.

15. The criminal and civil courts of first instance and appeal are
located in the provinces and in Lima. The Supreme Court is located
in Lima. In principle, Peruvian law recognizes secured interests
in property, both chattel and real. However, the judicial system
is often extremely slow to hear cases and to issue decisions. In
addition, court rulings and the degree of enforcement have been
difficult to predict. The capabilities of individual judges vary
substantially, and allegations of corruption and outside
interference in the judicial system are common. The Peruvian
appeals process also tends to delay final decisions. As a result,
foreign investors, among others, have found that contracts are
often difficult to enforce in Peru.

16. The 1997 Law of Conciliation (DL 26872), which went into effect
on January 1, 2000, requires disputants in many types of civil and
commercial matters to consider conciliation before a judge can
accept a dispute to be litigated. Private parties often stipulate
arbitration to resolve business disputes, as a way to avoid
involvement in judicial processes.

17. Peru's commercial and bankruptcy laws have proven difficult to
enforce through the courts. An administrative bankruptcy procedure
under INDECOPI (the National Institute for the Defense of Free
Competition and the Protection of Intellectual Property), has
proven to be slow and subject to judicial intervention. Peru has a
creditor hierarchy similar to that established under U.S.
bankruptcy law, and monetary judgments are usually made in the
currency stipulated in the contract.

18. The 1993 Constitution includes international arbitration of
disputes between foreign investors and the government or
state-controlled firms. Although Peru theoretically accepts
binding arbitration, on a few occasions over the past three years,
parastatal companies and Government Ministries disregarded
unfavorable judgments. Previously, the Government of Peru turned
these arbitration cases over to the judiciary, where they were
bureaucratically delayed until the companies conceded the cases.
However, effective July 2005, the Supreme Court ruled that all
arbitration findings and awards are final and not subject to
appeal.

19. Peru is a party to the Convention on the Recognition and
Enforcement of Foreign Arbitral Awards (the New York Convention of
1958), and to the International Center for the Settlement of
Investment Disputes (the Washington Convention of 1965). Disputes
between foreign investors and the Government of Peru regarding
pre-existing contracts must still be submitted to national courts.
However, investors who conclude a juridical stability agreement for
additional investments may submit disputes with the government to
national or international arbitration if stipulated in the
agreement. Several private organizations -- including the
Universidad Catolica, the Lima Chamber of Commerce and the American
Chamber of Commerce -- operate private arbitration centers. The
quality of these centers varies, however, and investors should
choose a venue for arbitration carefully.

20. The PTPA includes a chapter on dispute settlement. The core
obligations of the Agreement, including labor and environment

provisions, are subject to the dispute settlement provisions of the
agreement. Dispute panel procedures set high standards of openness
and transparency through; open public hearings; public release of
legal submissions by parties; special labor or environment
expertise for disputes in these areas; and, opportunities for
interested third parties to submit views. The Agreement emphasizes
promoting compliance through consultation and trade-enhancing
remedies.


Performance Requirements and Incentives

21. Peru offers both foreign and national investors legal and tax
stability agreements to stimulate private investment. These
agreements guarantee that the statutes on income taxes,
remittances, export promotion regimes (such as drawback),
administrative procedures, and labor hiring regimes in effect at
the time of the investment contract will remain unchanged for that
investment for 10 years. To qualify, an investment must exceed
US$10 million in the mining and hydrocarbons sectors or US$5
million in other sectors within two years. An agreement to acquire
more than 50 percent of a company's shares in the privatization
process may also qualify an investor for a juridical stability
agreement, provided that the infusion will expand the installed
capacity of the company or enhance its technological development.

22. There are no performance requirements that apply exclusively to
foreign investors. Peruvian civil law applies to legal stability
agreements, which means they cannot be altered unilaterally by the
government. Investors are also offered protection from liability
for acquiring state-owned enterprises.

23. Laws specific to the petroleum and mining sectors also provide
similar assurances as above to investors. Notably, in 2000, the
government modified the General Mining Law, substantially reducing
benefits to investors in that sector. Among the changes were: a
reduction in the term concessionaires are granted to achieve the
minimum annual production; an increase in fees for holding
non-productive concessions; an increase in fines for not achieving
minimum production within the allotted time; a reduction in the
maximum allowable annual accelerated depreciation; and revocation
of the income tax exemption for reinvested profits. In 2004,
Congress approved a bill charging a 1 to 3 percent royalty on
mining companies' sales. The changes do not affect those investors
who have signed legal stability agreements with the government
during the lifetime of the agreement. Under the U.S.-Peru Trade
Promotion Agreement, Peru agreed to eliminate a measure affecting
any sector in which a government concession is needed, such as
transportation, energy and mining, that requires U.S. enterprises
to buy locally. U.S. companies will be free to purchase on the
basis of price and quality, not origin of goods in these sectors.

24. In December 2006, after increased social demands for a share of
mining profits, the Garcia Administration and mining companies
agreed to a "voluntary contribution" system whereby mining
companies will invest in community infrastructure projects. This
agreement averted adoption of a more restrictive mining law, and
allows mining companies to control where they invest their
contributions, and ceases to apply if the prices of metals or
minerals drop from certain levels.

25. Parties may freely negotiate contractual conditions related to
licensing arrangements and other aspects of technology transfer
without prior authorization. Registry of a technology transfer
agreement is required for a payment of royalties to be counted
against taxes. Such registration is automatic upon submission to
ProInversion.

26. Current laws limit foreign employees to no more than 20 percent
of the total number of employees in a local company (whether owned
by foreign or national interests), and restricts their combined
salaries to no more than 30 percent of the total company payroll.
However, DL 689 (November 1991) provides a variety of exceptions to
these limits. For example, a foreigner is not counted against a
company's total if he or she holds an immigrant visa, has a certain
amount invested in the company (currently about US$4,000) or is a

national of a country that has a reciprocal labor or dual
nationality agreement with Peru. The law exempts foreign banks and
service companies, and international transportation companies from
these hiring limits, as are all firms located in free trade zones.
Furthermore, companies may apply for exemption from the limitations
for managerial or technical personnel. With the entry into force
of the U.S.-Peru Trade Promotion Agreement, Peru has agreed to
exceed its commitments made in the World Trade Organization (WTO),
and to dismantle significant services and investment barriers, such
as measures that require U.S. firms to hire nationals rather than
U.S. professionals and measures requiring the purchase of local
goods.


Right to Private Ownership and Establishment

27. Peruvian law generally grants foreign and domestic entities the
right to establish and own business enterprises and to engage in
most forms of remunerative activity. Subject to the restrictions
listed earlier in this document, both foreign and domestic entities
may invest in any legal economic activity -- including foreign
direct investment, portfolio investment, and investment in real
property. Private entities may generally freely establish,
acquire, and dispose of interests in business enterprises. In the
case of some privatized companies deemed important by the
government, the privatization agency ProInversion has included a
so-called "golden share" clause in the sales contract, which allows
the government to veto a potential future purchaser of the
privatized assets.


Protection of Property Rights

28. While the legal framework for protection of intellectual
property rights (IPR) in Peru has improved over the past decade,
enforcement mechanisms remain weak. Peru remains on USTR's Section
301 "Watch List" due to concerns about continued high rates of
copyright piracy, and inadequate enforcement of IPR laws,
particularly with respect to the relatively weak penalties that
have been imposed on IPR violators.

29. The International Intellectual Property Alliance (IIPA)
estimates that the piracy level in Peru for recorded music has
remained at 98 percent since 2003, with trade losses estimated at
US$57.2 million in 2008, a slight decrease from 2007 levels. The
IIPA estimates that software piracy levels remained at 71% in 2008
, with a loss of $46 million in 2008. The most recent data
available for motion picture piracy comes from a 2005 study
conducted by the Motion Picture Association of America (MPAA).
MPAA reported that motion picture piracy accounted for 63 percent
of the market for a loss of US$12 million in 2005.

30. The Peruvian government agency charged with promoting and
defending intellectual property rights is the Institute for the
Defense of Competition and Protection of Intellectual Property
(INDECOPI, http://www.indecopi.gob.pe
), established in 1992. Legislative Decree 822 of 1996 and Andean
Community Decisions 344 and 486 protect patents, trademarks, and
industrial designs. Copyrights are protected by Legislative Decree
No. 822 of 1996 and by Andean Community Decision 351.

31. Peru belongs to the World Trade Organization (WTO) and the
World Intellectual Property Organization (WIPO). It is also a
signatory to the Paris Convention on Industrial Property, Geneva
Convention for the Protection of Sound Recordings, Bern Convention
for the Protection of Literary and Artistic Works, Brussels
Convention on the Distribution of Satellite Signals, Phonograms
Convention, Satellites Convention, Universal Copyright Convention,
the World Copyright Treaty, and the World Performances and
Phonographs Treaty and the Film Register Treaty. In December 1994,
the Peruvian Congress ratified the World Trade Organization's
Agreement on Trade-Related Aspects of Intellectual Property
(TRIPs).

32. Under the PTPA, each party shall ratify or accede to the
following agreements: the Convention Relating to the Distribution

of Programme-Carrying Signals Transmitted by Satellite; the
Budapest Treaty on the International Recognition of the Deposit of
Microorganisms for the Purposes of Patent Procedure; the WIPO
Copyright Treaty; the WIPO Performances and Phonograms Treaty; the
Patent Cooperation Treaty; the Trademark Law Treaty; and, the
international Convention for the Protection of New Varieties of
Plants. Under the PTPA, each party shall make all reasonable
efforts to ratify or accede to the following agreements: the Patent
Law Treaty; the Hague Agreement Concerning the International
Registration of Industrial Designs; and, the Protocol Relating to
the Madrid Agreement Concerning the International Registration of
Marks.

33. Peru's legal framework provides for easy registration of
trademarks and inventors have been able to patent their inventions
since 1994. Peru's 1996 Industrial Property Rights Law provides an
effective term of protection for patents and prohibits devices that
decode encrypted satellite signals, along with other improvements.
Peruvian law does not provide pipeline protection for patents or
protection from parallel imports. Peru's Copyright Law is
generally consistent with the TRIPs Agreement.

34. However, despite this legal framework, piracy of textbooks,
books on technical subjects, audiocassettes, motion picture videos,
and software prevails. While the government, in coordination with
the private sector, has conducted numerous raids over the last few
years on large-scale distributors and users of pirated goods, and
has increased other types of enforcement, piracy continues to be a
significant problem for legitimate owners of copyrights in Peru.
The government needs to allocate more resources towards enforcement
and effective deterrence measures.

35. Despite recent amendments to the legal code creating stricter
penalties, the judicial branch has failed to impose sentences that
adequately deter future IPR violations. The Peruvian government in
July 2004 increased the minimum penalty for piracy to four year's
imprisonment. Through PTPA implementation legislation passed by
the Peruvian Congress in January 2009, the penalty for piracy
increased to eight years of imprisonment.

36. An IPR Toolkit for Peru can be found on the Embassy and
Commercial Service Lima's website (
http://www.buyusa.gov/peru/en/196.html). Besides being a guide to
registering and protecting IP, it contains a list of lawyers and
other organizations that can provide support on an on-going basis.

37. Under the U.S.-Peru Trade Promotion Agreement, in all
categories of intellectual property rights (IPR), U.S. companies
will be treated at least as well as Peruvian companies, and the
agreement makes a number of important improvements to IPR
protections. The Agreement provides for improved standards for
the protection and enforcement of a broad range of intellectual
property rights, which are consistent, both with U.S. standards of
protection and enforcement and with emerging international
standards. Such improvements include state-of-the-art protections
for digital products such as U.S. software, music, text, and video;
stronger protection for U.S. patents, trademarks and test data,
including an electronic system for the registration and maintenance
of trademarks; and further deterrence of piracy and counterfeiting
of criminalizing end-user piracy.


Transparency of Regulatory System

38. The transparency and independence of regulatory processes have
become central issues for foreign investors in Peru. Many of the
central government entities with which foreign firms must deal --
including the entities that maintain the company registry and
supervise securities and exchanges (CONASEV), handle privatization
and investment issues (ProInversion), and handle competition policy
and intellectual property matters (INDECOPI) -- have relatively
transparent and predictable procedures. The Superintendence of
Banking and Insurance (SBS) regulates banks, insurance companies,
and private pension funds. The SBS determines the qualifications
of potential market entrants and regulates firms once they have
begun operations. Under the U.S. - Peru Trade Promotion Agreement,

U.S. financial service suppliers have full rights to establish
subsidiaries or branches for banks and insurance companies.

39. When the Government of Peru (GOP) privatized state-owned
monopolies in the areas of telecommunications, electrical
generation and distribution, and the hydrocarbons sector in the
late 1990s, it also established regulatory institutions to oversee
the new private sectors. Delays and lack of predictability in the
rulings of these institutions, including OSIPTEL (telecom) and
OSINERGMIN (energy), have at times in the past been notable
impediments to doing business in Peru.

40. In December 2005, OSIPTEL published a new law that lowers
Peru's high mobile termination rates to levels comparable to
international rates over a 3-year period. However, given the
significant market changes since 2005, OSIPTEL is currently
reviewing industry data submitted in December 2009 to re-evaluate
the current rates. Several U.S. companies have encountered
problems with the energy sector regulator (OSINERGMIN) over its
hesitancy to provide unbiased regulation for the power industry.
Some regulatory agencies have in the past been subject to
politically motivated government intervention in their technical
operations.

41. U.S. firms have complained that SUNAT's (Peruvian Tax and
Customs Agency) aggressive behavior and interpretation of law are
often contrary to the spirit of the law and intent of government
policies, complicating normal business operations. The
remuneration of SUNAT employees is determined, in part, by the
theoretical tax liability they uncover in audits.

42. Businesses point out that SUNAT's retroactive reinterpretation
of regulations and laws, its levying of disproportionate fines, and
initiation of full company audits when companies request a refund
or legal revaluation of assets for depreciation purposes, create
additional investment and trade barriers. In one case, a U.S. firm
requested an improper drawback of US$1,345, only to face SUNAT
fines of US$645,000. Although the case was resolved, new
legislation was needed to correct the problem. In instances
involving airplane fuels and other products sold to carriers just
before they leave the country, certain minerals, and other
products, SUNAT for many years treated these goods as if they were
sold abroad, which under Peruvian tax laws are exempt from domestic
sales taxes. SUNAT reinterpreted the regulations and no longer
considered the goods as exports and therefore wanted to
retroactively subject the goods to VAT plus penalties. Two laws
were necessary to correct this practice for airline and seagoing
vessels' fuels and services. SUNAT often does not follow standard
international practice in the way it taxes new activities. To
correct these problems, the independent tax tribunals act to check
any abuses by SUNAT, but as a matter of course SUNAT normally
appeals tax tribunals' rulings, thereby extending indefinitely the
resolution of disputed assessments. In 2004, the GOP established a
tax ombudsman who must approve SUNAT's request to appeal adverse
tax tribunal decisions. In the past two years, the tax ombudsman
has acted in several cases to end unwarranted litigation of
disputed assessments. In 2005, a U.S. company won long-standing
tax cases against SUNAT as a result of these improvements. In
another instance, a minor error on a shipping document resulted in
the seizure of a U.S. firm's shipment by SUNAT, with the goods
destined for disposal at auction.

43. The World Bank 2010 report on Doing Business moves Peru to 56
up from 65 in the global ease of doing business ranking. Peru
completed reforms in six of the ten areas measured including
reformed business start-up, property registration, and contract
enforcement, made it easier to pay taxes, and sped up international
trade. Peru has significantly lowered the average amount of days
it takes to start a business from 72 in 2008 to 41 in 2010.
Additionally, Peru has eliminated one step for starting a business.
The World Bank report discusses the nine procedures for starting a
business in Peru. Businesses have complained about the 19 percent
value added tax on goods, high social security tax rates, and
certain labor laws, which increase investment costs significantly
and hinder the efficient mobilization and allocation of investment
capital. Businesses can apply for VAT reimbursement.

Efficient Capital Markets and Portfolio Investment

44. Credit is allocated on market terms and the banking industry in
Peru is generally considered to be competitive in offering services
to business customers. Private pension funds have competed in
recent years with financial companies for bonds issued locally by
companies and the Government of Peru, as supply of securities is
insufficient given the small size of the market. Foreign investors
can obtain credit and float bonds on the local market and several
of them have done so in the last few years as terms continue to be
more competitive than those of the usual international centers.
The private sector has access to a variety of credit instruments.
In December 2009, , firms placed US$1.7 billion on the local bond
market, a new record and a big recovery from the sharp fall of
2008, when placements totaled US$1.4 billion. Mutual Funds managed
US$4.9 billion in December 2009, a large recovery from the November
2008 level of US$2.8 billion but still below the record level of
US$5.2 billion of July 2008. By November 2009, pension funds
managed a total of US$23.73 billion, a strong recovery from the
October 2008 level of US$14.4 billion. All firms listed on the
Lima Stock Exchange (Bolsa de Valores de Lima) or the Public
Registry of Securities must be vetted by CONASEV, the National
Commission for the Supervision of Companies, Securities and
Exchanges, which maintains the Public Registry of Securities and
Stock Brokers. CONASEV is the Peruvian government entity charged
with the study, promotion, and regulation of the securities and
commodities markets; the control of market participants; the
maintenance of a transparent and orderly market; the setting of
accounting standards; and the publication of financial information
about covered companies. As part of CONASEV's goal to promote
market transparency, to prevent monopolies, and to prevent fraud,
issuers of stock are required to inform CONASEV and the relevant
stock exchange or body in charge of supervising the centralized
trading mechanism, of events that affect or might affect the stock,
the company, or any public offerings. Although trading on insider
information is technically a crime, no one has been charged and
punished under the law.

45. In 2008, the global financial crisis severely hit the local
capital markets. The Lima Stock Exchange (BVL), suffered the worst
hit showing an almost continuous decline beginning in July 2007,
dominated, as it is, by mining shares. The BVL General Index
reached an all-time high of 23,418 in July 2007, and tumbled
consistently until October 2008, when it reached 7,055 points.
Since March 2009, the index began a steady recovery hovering around
the 15,000 level from September 2009 until early 2010, making it
the world's fifth most profitable stock exchange at 99% in 2009.
Since most pension funds (AFPs) are invested locally, the private
pension funds companies and mutual funds also took a severe
pounding but by September 2009 the AFPs had recovered the losses
since June 2008, with its fund reaching a value of USD$23.8 billion
in December 2009

46. Total assets of the commercial banks were US$48.9 billion at
the end of November 2009, 3.4% above the same period of 2008. The
banking system is considered generally sound. The 2008-2009 global
financial crises has not affected local operating banks, a
reflection of sound banks policies aimed at strengthening their
position after the lessons learned during the 1997-1998 Asian
crisis; sound and able bank supervision, and strong GDP growth in
the last few years until 2008. Although GDP growth was
substantially lower in 2009, it was still positive according to
most forecasts. Opening of the economy since the 1990s coupled
with competition, have led to a significant consolidation in the
sector, which still continues with two new foreign banks being
authorized in 2008 to operate locally, and one (foreign-owned)
financial company to operate as a bank. Fifteen commercial banks
comprise the system, of which 3 banks account for two-thirds of
loans and over four-fifths of deposits. Banks have revamped
operations, increased capitalization, and reduced costs in recent
years. As of November 2009, foreigners had significant shares in
twelve banks, of which they were majority owners of ten (including
two of the country's large ones, and operator of one commercial
bank. Under the SBS's conservative criteria, 1.6% of total loans
were assessed as non-performing as of November 2009, down from a
high of 11% in early 2001 and very low since 2005. The system has
6 specialized institutions ("financieras"), 34 thriving
micro-lenders and savings banks, two state-owned banks, and one
state-owned development bank.

47. Larger private firms often use "cross-shareholding" and "stable
shareholder" arrangements to restrict investment by outsiders --
not necessarily foreigners -- in their firms. As close families or
associates generally control ownership of Peruvian corporations,
hostile takeovers are practically non-existent. Peruvian law and
regulations do not authorize or encourage private firms to adopt
articles of incorporation or association to limit or restrict
foreign participation; nor are there any private or public sector
efforts to restrict foreign participation in industry
standards-setting organizations.

48. Foreign direct investment as of September 2009 was US$34.7
billion, compared with US$31.6 billion a year earlier. Foreign
portfolio investment (dematerialized holdings of securities at the
Lima Stock Exchange only) totaled US$60.6 billion at the end of
November 2009, up from 39.4 billion in December 2008, and 57.0
billion in December 2007.

Competition from State-Owned Enterprises (SOEs)


49. In 1991, the Peruvian government began an extensive
privatization program, encouraging foreign investors to
participate. From 1991 through September 2005, privatization
revenues totaled US$9.4 billion, of which foreign investors were
responsible for the vast majority. Over three-quarters of these
transactions took place from 1994 to 1997. The government has
since shifted to a strategy of promoting multi-year concessions as
a means of attracting investment into major projects. In 2000, the
government granted a concession to a private group (Lima Airport
Partners) to operate the Lima airport and in June 2006, the
government granted a consortium of P and O Dover (U.K.) and Uniport
(Spain) a 30 year concession to operate the Container
Terminal-South Pier of the important seaport of Callao. Also in
2006, Dubai Ports signed a concession agreement to build and
operate a new container terminal within the Port of Callao. The
facility is expected to become operational in 2010. In August
2006, Swissport received a 25 year concession to manage nine of
Peru's northern airports. The GOP has been soliciting bids for 25
year concessions to manage six of Peru's southern airports, as well
as, multi-year concessions for various energy, natural gas,
hydro-energy and irrigation, telecommunications, ports, sanitation,
land transport, trains, and tourism projects, some of these bids
have been postponed. Several electricity, water, sewage, bank, and
oil (Petroperu) companies remain state-owned and operated.

50. In June 2004, the Congress passed a law to exclude state-owned
oil company Petroperu from privatization and authorized Petroperu
to conduct exploration and production activities. This modified
the government's policy since the early 1990s, when it sold all of
Petroperu's exploration and production units and a major oil
refinery. Under the 2004 law, the government had the option of
granting concessions on remaining Petroperu assets, including one
pipeline and several refineries. In July 2006, Congress defeated
an executive veto of a bill to "strengthen and modernize"
Petroperu. Under the 2006 law, the government authorized Petroperu
to resume exploration, production and related activities, including
petrochemicals; was freed from contracting approval by CONSUCODE,
the state procurement supervision agency; was exempted from the
approval of its investment projects by the Government Projects
Office (SNIP); and had a worker on its board of directors. In
2008, a corruption scandal, related to the oil and gas concessions
which resulted in the resignation of the Minister of Energy and
Mines and the PetroPeru President, forced the Government of Peru to
revise the 2006 law and implement a number of changes in the
management of PetroPeru. PetroPeru will return under the control
of the National Fund for Financing Government Companies (FONAFE), a
government oversight entity. This will require their compliance
with set regulations and norms, such as tight budget controls,
contracting approval by OSCE (formerly CONSUCODE), and approval of
its investment projects by SNIP. The Minister of Energy and Mines
has stated that the state-owned company would not undertake oil
exploration endeavors. The Government of Peru still wants to put
Petroperu on the stock market, but it is not clear when this will
happen. Petroperu has a strategic alliance with Brazil's Petrobras
for oil and gas exploration-production and petrochemicals.

Corporate Social Responsibility


51. Peruvian businesses participate in Corporate Social
Responsibility programs on primarily a voluntary level. For the
energy and mining sector, certain regulations do exist to promote
social responsibility. Decreto Supremo N???? 042-2003-EM - IT,
promotes social responsibility within the mining sector including
encouraging dialogue with the local communities, local employment,
development activities, and purchase of local goods and services.
The norm requires the mining companies to provide an annual report
on sustainable development activities. The Peruvian Ministry of
Energy and Mining offers on a voluntary basis a guidebook for
community relations, as well as, providing on its website
information on social measures pertaining to the mining and energy
sectors.


Political Violence

52. Although political violence against investors is not a common
practice, the mining and petroleum communities witnessed a series
of protests, some violent, since 2005. In September 2007,
residents of three northern Piura towns voted overwhelmingly in a
referendum to reject mining projects in their region, which has
stalled development of a large copper mining project. Other
communities around Peru have expressed interest in holding similar
referenda. Protests against the mining industry occurred for
various reasons. Although environmental concerns were often the
cited pretext, in many cases protestors were seeking social
infrastructure investments not provided by the government. Often
times, well-organized groups, such as the Ronderos (local
self-defense groups that were instrumental in combating the Shining
Path terrorists in the 1980s and 1990s.) or NGOs, exaggerated a
local community's concerns, bringing in protestors from outside the
local community to foment protests against the companies. In
several incidents since 2005, the local mayor and other local
authorities led strikes against large foreign mining companies in
an effort to secure additional funds or development promises from
the companies. During 2009, there were road blockages and acts of
vandalism by groups protesting mining operations, coca growers
protesting the Government's eradication policies, and farmers
seeking increased government tariff protections and financial
support. A two month long protest of indigenous communities in the
Amazon against a series of legislative decrees culminated in a
violent clash on June 5, which left 24 police and 10 civilians
dead. Protesters believed the decrees were legislated without
proper prior consultation with indigenous communities. Some
protesters also complained of the content of the decrees, and said
the decrees favored private investors and extractive industries
over indigenous communities. Concerns over the titling of
indigenous lands and subsoil concessions continue to be potential
sources of conflict, particularly in the Amazon.

53. Cabinet ministers and often the Prime Minister have become
personally involved in negotiating a resolution to protests since
the beginning of the Garcia Administration. The government
established a commission in late 2006 to prevent and resolve social
conflicts in the extractive industries. In addition, various NGOs
have become involved in conflict resolution activities. At the
same time, the National Society of Mining and Petroleum (SNMPE), as
well as the government, have become involved in assisting local
communities to access the extractive industry canons as a way to
both stimulate local development and head off social conflicts.
Although these efforts have been effective in some mining regions,
in others, social conflicts have continued or expanded.

54. Political violence remains a concern in the coca-growing
regions. The Shining Path (Sendero Luminoso) terrorist
organization has become increasingly aggressive and involved in
narcotrafficking in these areas. Sendero remnants are presumed to
have killed more than 3 police, 26 civilians, and 19 members of the
military, and committed more than 100 terrorist acts in
coca-growing areas during 2009. The Shining Path killed 2
civilians, 11 police officers, and 17 military members in 2008, and
were responsible for around 70 terrorist incidents that year.
President Garcia continues to reauthorize 60-day states of

emergency in parts of Peru's four departments where the Shining
Path operates, suspending some civil liberties and giving the armed
forces additional authority to maintain public order.

55. There is little government presence in the remote coca-growing
zones of the Monzon and the Apurimac-Ene River valleys. The U.S.
Embassy in Lima restricts visits by official personnel to these
areas because of the threat of violence by narcotics traffickers
and remaining columns of the Shining Path. Information about
insecure areas and recommended personal security practices can be
found at http://www.ds-osac.org/.


Corruption

56. It is illegal in Peru for a public official or employee to
accept any type of outside remuneration for the performance of his
or her official duties. Peru has ratified both the UN Convention
Against Corruption and the Organization of American States'
Inter-American Convention Against Corruption. Peru is not a member
of the Organization of Economic Cooperation and Development, and
has not signed the OECD Convention on Combating Bribery.

57. Peru is one of four nations worldwide participating as a pilot
country in the G8 anti-corruption and transparency initiative. The
U.S., other G8 partners and NGOs helped the Peruvian government
develop an action plan that includes activities in six areas: a)
citizen information/internet connectivity; b) improving central
government fiscal transparency; c) development of GOP procurement
systems; d) improving regional/local government transparency and
management; e) improvement of transparency of extractive industry
revenues; and f) development of asset forfeiture systems and
legislation.

58. The G8 initiative has already shown some positive results. A
hemisphere-wide state procurement organization - the Inter-American
Organization of Government Procurement Institutions - was created
under the leadership of Peru's State Procurement Council OSCE
(formerly CONSUCODE). As of January 2007, eight countries are in
the process of adopting the network agreement, prior to its
signature (Bolivia, Colombia, Ecuador, Honduras, Mexico, Paraguay,
Peru and Paraguay). Also, efforts are underway to provide Internet
connections to approximately 90 municipal governments located in
areas most affected by terrorism and poverty. The rural
connectivity project will allow these governments access to
national systems, part of the GOP's E-government initiatives, aimed
at creating greater transparency and citizen access to public
information.

59. U.S. firms have reported problems directly resulting from
corruption, usually in government procurement processes and in the
judicial sector, but the revelation in late 2000 of a broad and
deep corruption ring organized by former presidential advisor
Vladimiro Montesinos heightened awareness of the problem.
Transparency International ranked Peru number 75 (out of 180
countries) in its 2009 Corruption Perception Index. While
anti-corruption efforts have been a stated priority of both the
Toledo and Garcia Governments, in practice most resources are
directed at investigating Fujimori-era corruption. In 2001,
President Toledo appointed an anti-corruption "czar" to lead
government efforts, but this official resigned in 2002. The Judge
Carolina Lizarraga was appointed in October 2007 as the head of the
newly created National Office for Anti-Corruption, but she resigned
in July 2008. Private sector groups have increased efforts to
combat corruption through an NGO called "ProEtica," which
represents Transparency International in Peru. In October 2008, a
kickback scandal involving a member of the ruling party and a
foreign oil company led to the replacement of President Garcia's
Prime Minister and the changing of five other cabinet members,
although investigators have not established that the Prime Minister
was involved in the scandal.


Bilateral Investment Agreements

60. Peru has signed bilateral investment agreements with 32

countries (listed below), but not with the United States. The
U.S.-Peru Trade Promotion Agreement (PTPA), signed by President
Bush on December 14, 2007 and entered into force on February 1,
2009, eliminates the need for a bilateral investment agreement.

61. Peru's Current Bilateral Investment Agreements:

Argentina (1994)

Ecuador (1999)

Paraguay (1994)

Australia (1995)

El Salvador (1997)

Portugal (1994)

Belgium-Luxembourg E.U. (2005)

Finland (1995)

Romania (1994)

Bolivia (1993

France (1993)

Singapore (2003)

Canada (2006)

Germany (1995)

Spain (1994)

Chile (2000)

Italy (1994)

Sweden (1994)

China (1994)

Japan (2009)

Switzerland (1991)

Colombia (1994)

Korea (1993)

Thailand (1991)

Cuba (2000)

Malaysia (1995)

United Kingdom (1993)

Czech Rep (1994)

Netherlands (1994)

Venezuela (1996)

Denmark (1994)

Norway (1995)


OPIC and Other Investment Insurance Programs

62. The Overseas Private Investment Corporation (OPIC), an
independent U.S. Government agency, offers medium- to-long-term
financing and political risk insurance. OPIC signed two agreements
with Peru in December 1992, and in July 1994, OPIC approves
requests for political risk insurance (including for
inconvertibility of currency). In 2008, OPIC announced that its

Board of Directors approved $350 million in financing for three new
private equity investment funds that will provide capital to a host
of sectors in the economies of Latin America. OPIC designated Peru
as a beneficiary for all three funds. The following sectors will
be targeted: telecommunications, finance, agribusiness, tourism,
real estate, natural resources, energy, water and waste management,
transportation, infrastructure, and services.

63. Because of the free convertibility of currency, the U.S.
Embassy purchases Peruvian currency for expenses on an as-needed
basis, at the market exchange rate. The U.S. dollar remained at
about 2.8 Nuevo Sol to the dollar throughout 2009. Peru is a
member of the Multilateral Investment Guarantee Agency.


Labor

64. Labor is abundant and trainable, although there are shortages
of highly skilled workers in some fields and wages for professional
staff are high (sometimes higher than U.S. wages in the mining
sector for positions in the managerial and consulting fields). On
October 1, 2007, the government increased the statutory monthly
minimum wage by 10 percent to 550 Nuevos Soles (about US$180.)
Some workers, like miners, are highly paid and also (per statute)
receive a share of company profits. On July 1, 2008, mining
workers began an unsuccessful indefinite national strike to force
lawmakers to pass a law that would remove the cap mining workers
receive on their share of company profits. The law provides for a
48-hour workweek and one day of rest and requires companies to pay
overtime for more than eight hours of work per day and additional
compensation for work at night. Unions in essential public
services, as determined by the government, must provide a
sufficient number of workers during a strike to maintain
operations. The law bans government unions in essential public
services from striking. However, in September 2008 the public
health sector workers went on strike to demand owed back pay,
better pay and resources to treat patients. The strike ended 38
days later with formal talks between the union and the government.
The law also requires strikers to notify the labor ministry in
advance before carrying out a job action. According to the labor
ministry, seven legal strikes and 84 illegal strikes took place
between January and November 2009. According to labor leaders,
permission to strike was difficult to obtain, in part because the
labor ministry feared harming the economy. The Ministry of Labor
justified its decisions by citing unions' failure to fulfill the
legal requirements necessary to strike.

65. The presence of organized labor in the Peruvian economy has
declined; in 2007, 7.06 percent of the labor force was organized.
Unemployment in Lima officially stood at 8.6% during the fourth
quarter of 2008, compared with 8.4% a year earlier. Surveys show
that 48.9% of Lima's economically active population was
underemployed in 2008 (51.7% in 2007 and 52.4% in 2006), mostly
working as self-employed in the informal sector for below
subsistence wages.

66. In 1992, a new labor law and other related statutes replaced
extremely inflexible old statutes and regulations. The new laws
allow for multiple forms of unions across company or occupational
lines, thus permitting multiple unions in the same company.
According to labor leaders the law has weakened unions, as
companies create competiting unions that are seen as more favorable
to management. Workers in probation status or on short-term
contracts are not eligible for union membership. Bargaining
agreements are considered contractual agreements, valid only for
the life of the contract. Productivity provisions must be included
in any collective bargaining agreement. The number of officials
and the amount of time union officials may devote to union work
with pay is limited to 30 days per year. Unless there is a
pre-existing labor contract covering an occupation or industry as a
whole, unions must negotiate with each company individually. A
labor law passed in July 1995 liberalized hiring. Business leaders
lauded the above changes, saying they led to greater efficiency.
Labor leaders disagreed, arguing that the new labor laws eroded
labor protections and encouraged outsourcing in a way that
undercuts union activity.

67. With Peru's return to democracy in 2000, Peruvian organized

labor regained some, but not all, of the protections enjoyed in the
pre-Fujimori era. A decision by the Constitutional Tribunal in
2004, for example, legitimized collective industry-wide bargaining
in the civil construction industry. Labor leaders saw this as a
potential precedent to be applied to other activities, but that has
not yet happened. Furthermore, new laws added to labor
inflexibility because the restrictions for termination and
downsizing have made businesses reluctant to hire new employees and
have created incentives to outsource. A new law passed on 2008
created more restrictions on outsourcing and subcontracting, made
the contracting company more responsible for the actions of their
subcontracted company, and created a national registry of
contracting companies. The PTPA requires Peru to respect the
ILO-defined core labor rights of its workers, and at the close of
2009 the GOP was set to establish a labor council to monitor
progress to this end.

68. Either unions or management can request binding arbitration in
contract negotiations. Strikes can be called only after approval
by a majority of all workers (union and non-union) voting by secret
ballot and only in defense of labor rights. Unions in essential
public services, as determined by the government, must provide a
sufficient number of workers during a strike to maintain
operations.

69. The 1993 Constitution provides for a maximum workday of eight
hours, with 48 hours as the maximum week. The labor code also sets
24 hours rest per week and 30 days paid annual vacation for all
workers. In 2008, a new law reduced severance pay and bonuses by
50% and paid annual vacation to 15 days for small business workers.
Workers readily sacrifice these and other benefits in exchange for
regular employment. In 2008, a new law gave micro-business
workers social security and pensions. Strike activity declined
markedly over the ensuing nine years and since new labor laws were
passed, worker efficiency rose substantially. However, strikes and
militant industrial action continue to increase. The overall
number of strikes fell in 2008. Through September 2008, there were
53 strikes with a loss of 1, 397,188 man-hours, compared with 55
strikes and a loss of 1,366,272 man-hours in the same period of
2007.

70. Congress continues to debate a comprehensive labor law reform,
which may result in a return to inflexibility of the conditions of
dismissal for employees.


Foreign-Trade Zones/Free Ports

71. Peruvian law currently covers two types of free trade zones:
export, transformation, industry, trade and services zones
(CETICOS), and a free trade zone (ZOFRATACNA) in Tacna. The rules
and tax benefits applying to these zones are the same for foreign
and national investors.

72. Companies established at the CETICOS and ZOFRATACNA, which
export no less than 92 percent of their output (more than 80
percent of production for the Loreto CETICOS and more than 50
percent for ZOFRATACNA), are exempted until 2012 from all taxes,
dues and contributions to the central government and
municipalities, particularly income, sales (IGV), Municipal
Promotion (IPM) and excise (ISC) taxes. CETICOS exist at Ilo,
Matarani and Paita, with one authorized but not operating at
Loreto. There is a concern that the Peruvian Government does not
have the proper WTO waivers to validate the CETICOS export
requirement. The U.S. automotive industry has expressed a specific
concern that U.S. brands are unable to compete with used Japanese
vehicles that enter the Peruvian market duty-free through the
CETICOS. The Ministry of Transportation and Communications plans
to ban the importation of used vehicles by 2010, citing
environmental and security concerns.


Foreign Direct Investment Statistics

73. The stock of foreign direct investment in Peru was US$34.7
billion at the end of September 2009 according to Peru's Central

Bank, versus US$30.2 billion in December 2008. The U.S. Department
of Commerce reported that U.S. direct investment in Peru on a
historical-cost basis was over $8.4 billion in 2008, making the
U.S. Peru's largest foreign investor. Foreign direct investment
registered with ProInversion for the purposes of legal stability
contracts reached US$18.4 billion by September 2008. Of these
Spanish investors held the largest share (23 percent), with US$4.1
billion invested. The United Kingdom was the second largest
investor, with US$3.6 billion, and the United States third, with
US$2.7 billion. By sector, the mining industry received 20.3
percent of foreign direct investment, followed by the communication
industry (20.06 percent), manufacturing (15.4 percent), and finance
(15. 15.2 percent)

74. As of the end of December 2009, investors and companies had
signed 715 legal stability contracts with the Government of Peru
through ProInversion. Legal stability contracts commit the
government not to apply any future changes in the income tax, labor
and other laws governing a specific investment in exchange for
commitments to invest a given amount. Those contracts offer legal
stability for ten years, or for the duration of the concession in
the case of concession contracts. In addition to these contracts,
the Government of Peru has signed numerous tax, foreign exchange
and administrative stability contracts through several ministries,
mainly the Ministry of Energy and Mines. Investors may subscribe
to a legal stability contract with a minimum investment of US$10
million in the mining and oil industries and US$5 million in other
sectors.
NEALON

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