ARGENTINA -- 2006 INVESTMENT CLIMATE STATEMENT

UNCLAS SECTION 01 OF 08 BUENOS AIRES 000033

SIPDIS

SIPDIS

STATE FOR EB/IFD/OIA, WHA/BSC, AND WHA/EPSC
DEPT PASS USTR

E.O. 12958: N/A
TAGS: EINV EFIN ETRD ELAB KTDB PGOV OPIC USTR
SUBJECT: ARGENTINA -- 2006 INVESTMENT CLIMATE STATEMENT
(PART 1 OF 2)

REF: 05 STATE 202943

The following is Part I of the 2006 Investment Climate
Statement for Argentina. Begin Text:

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A.1. Openness to Foreign Investment
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Argentina is open to foreign investment. Argentina ended its
1-to-1 conversion rate with the U.S. dollar in January 2002
and pesified bank accounts and contracts. The move to a
market-based exchange rate regime has altered the investment
situation substantially from that of the 1990s, when the
country's flexible investment regime and fixed 1-to-1
conversion rate with the US dollar (USD) spurred significant
foreign investment. Many sectors that were uncompetitive
under peso-dollar parity (convertibility) now offer
investment opportunities, even while the pesification of
dollar-denominated contracts undermined the financial base
for many existing foreign investments. The Kirchner
Administration encourages new foreign investment and has
expressed a preference for U.S. companies. Legal
uncertainties continue concerning creditor, contract and
property rights, and frequent and unpredictable regulatory
changes have diminished the attractiveness of some sectors
for foreign investors.

Then-president Menem imposed convertibility in 1992 to break
the back of hyperinflation and adopted far-reaching
market-based policies. Menem's accomplishments included
dismantling a web of protectionist trade and business
regulations, and reversing a half century of statism by
implementing an ambitious privatization program. These
reforms contributed to significant increases in investment
and growth with stable prices through most of the 1990s.
Unfortunately, widespread corruption in the Menem and
successor De la Rua administrations shook confidence and
weakened the recovery. Also, while convertibility defeated
inflation, its permanence 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 country was also hurt by the contagion effect of the
Asian financial crisis of 1998. Argentina went into
recession in late 1998, which deepened into depression that
culminated in a financial panic in late. In December 2001,
amidst bloody riots, President De la Rua resigned, and
Argentina defaulted on USD 88 billion in debt, the largest
sovereign debt default in history. In February 2005,
investors holding 76 percent of Argentina's defaulted
principal accepted a government offer of approximately 30
cents per dollar face value of old debt in what became the
largest sovereign restructuring in history. As of this
writing, the government of Argentina has not presented a plan
for dealing with bondholders who chose not to participate in
the restructuring.

An export-led boom has spurred a surge in real GDP growth
over the past three years. Argentina's economy grew 8.7
percent in 2003, 9.0 percent in 2004, and is projected to
grow 8.3 percent in 2005. Industrial activity and
construction have performed well, growing 7.7 percent and
13.9 percent, respectively, during the first eleven months of

2005. Domestic car sales and exports increased 33.9 percent
and 26.7 percent, respectively, in the first eleven months of

2005. Tourism has soared, with Argentina receiving an
estimated 3.7 million foreign tourists in 2005, a record.

The expansion is creating jobs, and unemployment dipped from
16.3 percent in the third quarter of 2003 to 11.1 percent
during the third quarter of 2005. Investment in real terms
is forecast by the Central Bank to have jumped 18.3 percent
in 2005, and capital flight reversed. The recovery,s strong
impact on revenue levels and the Kirchner Administration,s
sound fiscal policy achieved exceptional results, with the
federal fiscal surplus reaching approximately 3.7 percent of
GDP in 2005 (although federal public spending grew a nominal
23.4 percent annually in the first three quarters of 2005).

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Provincial fiscal figures for 2005 are very preliminary at
this writing, so it is difficult to include consolidated
fiscal figures for both the national and provincial
governments. The consolidated primary surplus was 5.1
percent of GDP in 2004. However, the tax burden is now
nearly 27 percent of GDP, up from 21 percent in 2000.

Meanwhile, the move to a market-based exchange rate regime
and high global commodity prices have lifted exports to
record levels and, together with a sharp decrease in imports
in 2002, assured hefty surpluses in Argentina,s trade and
current accounts of the balance of payments. The favorable
balance of payments performance and Argentina,s non-payment
of its private debt obligations allowed a strong accumulation
of foreign exchange reserves, which reached nearly USD 28.1
billion at the end of 2005, representing 11.8 months of
current imports. However, the GOA in early 2006 used
reserves to cancel all of Argentina's debt with the IMF, so
reserves dropped by approximately USD 9.5 billion in one
transaction. Argentina's remaining reserves represent
approximately 7.7 months of current imports. The demand for
pesos increased over 125 percent between November 2002 and
November 2005 due to the recovery of economic activity and
the appreciation of the peso.

Argentina,s Central Bank has ably managed monetary policy in
support of the economic expansion, achieving low interest
rates and relatively stable prices, although inflation is a
growing concern. Banks are now in the black on an operating
basis and net credit levels to the private sector are
positive. However, most bank deposit growth derives from
short-term, public sector deposits, and therefore cannot
serve as the basis for a long-term credit policy for private
sector financing. Banks also report that demand for
commercial credit remains low. As a consequence, credit
growth to the private sector has lagged growth in the economy.

Argentina,s impressive recovery is a function of a number of
factors. First, following a decade of market reforms, the
economy was fundamentally sound except for the high level of
indebtedness. Second, the adoption of a market exchange rate
and favorable international commodity and interest rate
trends were catalytic factors in the export-led boom.
Argentina's successful debt exchange and prepayment of its
IMF debt will likely strengthen the country going forward,
and Argentina should continue to perform well in 2006, with
growth projected to be in the 5-7 percent range.

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" 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

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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 government of Argentina has established a number of
investment promotion programs. Those programs allow for VAT
refunds and accelerated depreciation of capital goods for
investors; offer tariff incentives for local production of
capital goods; and include sectoral programs, free trade
zones, and a special Foreign Trade Area in Tierra del Fuego,
among other benefits. A complete description of the scope
and scale of Argentina,s investment promotion programs can
be found at http://www.industria.gov.ar/. Information about
programs that specifically apply to small and medium
businesses may be found at http://www.sepyme.gov.ar/.

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A.2. Conversion and Transfer Policies
--------------

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 government of Argentina instituted and subsequently
modified an array of emergency transfer and currency
conversion restrictions. The number of new regulations and
the frequency of policy changes have generated considerable
uncertainty for investors.

The Central Bank has 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. Note: In nominal terms, the peso appreciated
22 percent against the USD in 2003, 13 percent in 2004, and
did not change in relation to the USD during 2005. Central
Bank Communication 46806 eliminated the requirement to have
the Central Bank authorize principal payments on financial
debt. This communication also allows exporters to surrender
export proceeds to financial institutions instead of only to
the Central Bank. Subsequently, Central Bank Circular 4128
increased to USD 2 million per month the amount of foreign
currency that an individual or company can purchase without
Central Bank authorization. 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.

Argentina imposed limited capital controls in July 2003
through Decree 285/2003, which establishes a regimen 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. Central Bank Circulars 3972 and 3973
implement Decree 285/2003. Circular 3972 mandates that any
financing received from the financial or non-financial sector
must remain in the country for a minimum of 180 days.
Circular 3973 eases access to the foreign exchange market to
repay financing in advance. The Central Bank may continue
easing capital controls in the future.

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.
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A.3. Expropriation and Compensation
--------------

Article 4 of the United States-Argentina BIT states that
investments shall not be expropriated or nationalized except

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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.

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A.4. Dispute Settlement
--------------

The government of Argentina 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 government of Argentina issued Decree
926/2003, which created two new agencies to carry out
amicable 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 Attorney General's
Office, 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 Contracts8 (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 Attorney General. It receives investor
complaints, gathers information and carries out negotiations
with foreign investors.

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. 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. There have been
allegations of corruption in the administration of
bankruptcies and the selection of bankruptcy trustees.

As noted above, 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 36 disputes
involving Argentina in international arbitration as of
December 15, 2005, and the number is expected to grow in

2006. The amount claimed in these disputes exceeds USD 15
billion. However, several ICSID claimants, including at
least one U.S. claimant, withdrew their claims during 2005
after successful negotiations with the Argentine government.

In addition, there are thousands of administrative and

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judicial claims against the government of Argentina at the
local level. The government of Argentina is pressuring ICSID
claimants who hold public service contracts to drop their
claims in exchange for the re-negotiation of their contracts.
All 62 public service contracts were supposed to be
re-negotiated by December 31, 2004, but only a few (less than
five) were concluded by that date, and even those were
concluded on a temporary basis. The pace of contract
renegotiations picked up in 2005, however. By November 2005
fifteen contracts had been renegotiated outside the formal
renegotiation process while twenty-five had been renegotiated
within that process. The remaining twenty-two were still in
negotiations as of this writing.

There also remains substantial legal uncertainty about the
value of pesified contracts and the legality of pesification.
Thouands of depositors have gone to court challenging the
constitutionality of the pesification of their
dollar-denominated bank accounts and have obtained judgments
obligating their banks to repay them in dollars or in pesos
at the market rate of exchange. The Supreme Court, in a July
2004 decision involving a province's deposits at a state
bank, ruled that pesification was unconstitutional, but did
not extend that ruling to other cases involving other
depositors. In another ruling, this time in late October
2004, the Supreme Court ruled that pesification of a bank
account was constitutional. However, the five justices
deciding the case issued four separate opinions that had
little in common. Additionally, lower courts in Argentina
are not required to follow a Supreme Court decision except in
the particular case ruled upon, and lower courts have largely
ignored this decision and continue to issue orders to banks
to pay depositors.

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A.5. Performance Requirements and Incentives
--------------

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 based on 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, fisheries and forestry).

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A.6. Right to Private Ownership and Establishment
-------------- --------------

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. The Embassy is monitoring a case in which U.S.
media investors allege that the government of Argentina,
citing the &cultural goods8 law, has refused to recognize
their ownership stake. 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" rules in restructuring and
bankruptcy.

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A.7. Protection of Property Rights
--------------

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, since February 2002, the
government of Argentina has continued to extend a temporary
moratorium prohibiting financial institutions from
foreclosing on delinquent mortgages on primary residences.

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The last extension of the moratorium came on November 4,
2005, and provided protection to homeowners' primary
residences for another 120 days. In another case, the
government of Argentina intervened to prevent a secured
creditor from repossessing leased locomotives from a railroad
concessionaire, citing "public service" needs. The
government of Argentina has neither offered nor paid
compensation for the continued retention of the locomotives.

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.

Patents:

Patent law is the weakest element in Argentina's intellectual
property rights regime, and extension of adequate patent
protection to pharmaceuticals has been a highly contentious
bilateral issue. In early 1997, the U.S. announced the
suspension of 50 percent of Argentina's trade benefits under
the Generalized System of Preferences (GSP) because of
inadequate protection of pharmaceutical products. In
November 2000, after years of protracted debate, a new patent
law took effect and a number of pharmaceutical patents were
issued. This law improved earlier Argentine patent
legislation, but provides less protection than that called
for in the Agreement on Trade-Related Aspects of Intellectual
Property Rights (TRIPS). 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. Legislation implementing the April
2002 agreement was passed in December 2003. However, certain
U.S. and European pharmaceutical firms are concerned that
provisions in the legislation could undercut the limited
success they have achieved in protecting their products
through judicial injunctions.

Copyrights, Trademarks, Trade Secrets, and Semiconductor Chip
Layout Design:

The legal framework to protect intellectual property such as
books, films, music, and software in Argentina has improved
in recent years. However, the economic crisis of 2002 led to
an increase in the use of unlicensed software and optical
media. Argentine authorities continue their efforts to
combat the piracy of videotape, software and other
copyrighted material, but enforcement continues to be
sporadic and pirated products are still 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. The government has also improved the
process for trademark registration. 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.

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A.8. Transparency of the Regulatory Regime
--------------

During the 1990s, the government of Argentina eliminated
virtually all restrictions on domestic and foreign trade of

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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 acted in certain cases 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 debtor's powers considerably,
but the National Congress restored many of the law's earlier
protections for creditors in May of that year.

Other regulatory changes in 2002 added to creditor
insecurity. The government 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 government's
discovery that the decree had been voided inadvertently
months before came at a time when the government of Argentina
was worried about its access to foreign exchange and the
devaluation of the peso. When the peso began to appreciate,
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.

The government's actions since 2003 have not calmed investor
concerns about the regulatory environment. The government of
Argentina issued a decree de-pesifying 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
government of Argentina took measures to avoid energy
shortages that arose from the increase in demand for natural
gas and electricity in 2004: 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
government of Argentina has also pressured companies to
invest in the expansion of natural gas pipelines, and has
pressured power companies to invest compensation owed them by
the government of Argentina in power plants the government of
Argentina wishes to construct. There is a concern that the
abovementioned GOA actions in the energy sector, coupled with
the GOA's attempts 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 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 two major taxes: the income
tax and value added tax ("VAT"). 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 in five

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years. 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 should receive VAT rebates, but
many companies have experienced extensive delays in the
receipt of these rebates.

At the provincial level, the system of provincial sales taxes
has encouraged the 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 taxes. Many investors allege
that the supply tax 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.
GUTIERREZ