ARGENTINA -- 2006 INVESTMENT CLIMATE STATEMENT

UNCLAS SECTION 01 OF 04 BUENOS AIRES 000034 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 2 OF 2) REF: 05 STATE 202943 The following is the second part of Embassy Buenos Aires' 2006 Investment Climate Statement for Argentina. Begin text of Part II: -------------- -------------- A.9. Efficient Capital Markets and Portfolio Investment -------------- -------------- 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 and securities firms are well represented in Argentina and are among the most dynamic players in the local capital markets. The private pension fund system -- consolidated in 1995 -- provided an important growing base for capital markets until the beginning of the recent crisis. 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. -------------- A.10. Political Violence -------------- Protests, marches, and roadblocks directed at the national, provincial and municipal governments are 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. During 2004, however, in what appear to have been mostly unrelated incidents, unknown persons placed thirteen bombs, which either exploded or were detonated by police, and four other incendiary devices in banks and other commercial establishments. One bank guard was killed and a policeman seriously injured in December 2004. 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. -------------- A.11.a. Corruption -------------- Government corruption and private sector business fraud are the subject of frequent complaints from U.S. investors, and 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. Surveys by Transparency International and other business and academic groups have contributed to more open debate about corruption and fraud, however. Some foreign firms tend to be at a competitive disadvantage since, in certain industries, they are more likely to pay taxes than their domestic competitors. There are strong indications that the government of Argentina is trying to change the culture of non-payment 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 over 118.5 billion pesos in 2005 (compared with around 98.3 billion in 2004 and 72 billion in 2003), with revenues increasing from all taxes. The government of Argentina maintains that official corruption has decreased dramatically as a result of the privatization of most state enterprises over the past decade. BUENOS AIR 00000034 002 OF 004 Argentina is a party to the OAS Anti-Corruption Convention and ratified the OECD Anti-Corruption Convention in 2001. 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. Press reports indicate, however, that some public officials have refused to provide the required disclosure statements on the grounds that compliance would expose them to kidnapping attempts. The anti-corruption office also carries out investigations into cases of alleged corruption involving Executive branch officials. 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. -------------- A.11.b. Bilateral Investment Agreements -------------- 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. Argentina does not have a bilateral tax treaty (Treaty for the Mutual Avoidance of Double Taxation) with the United States. Over the past decade, the government of Argentina has signed over 50 bilateral treaties for the protection and promotion of investment, including with all of its major trade and investment partners. Forty-four of these agreements have been ratified by the Argentine Congress and are in force. More information regarding Argentina's bilateral tax and investment treaties is available at www.infoleg.gov.ar. -------------- -------------- A.11.c. OPIC and other Investment Insurance Programs -------------- -------------- The government of Argentina signed a comprehensive agreement with the Overseas Private Investment Corporation (OPIC) in ¶1989. Argentina is also a member of the World Bank's Multilateral Investment Guarantee Agency (MIGA). -------------- A.11.d. Labor -------------- Argentine workers are among the most highly educated in Latin America. Argentine workers were also relatively well paid prior to the peso devaluation in January 2002. High inflation following the devaluation eroded the value of their wages in 2002. Wages in dollar terms are now more competitive, even taking into account Argentina's relatively high social security charges and other taxes. As of the third quarter of 2005, the official unemployment rate was 11.1 percent, but this number excludes recipients of government assistance to unemployed heads of households. If those recipients were included, unemployment would be approximately 14.1 percent. The government of Argentina passed a modest labor reform law in 2000 to address rigidities in the labor market (i.e., by 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. The government passed a new labor law reform in 2004, which did not result in significant changes to the existing regime. -------------- BUENOS AIR 00000034 003 OF 004 A.11.e. Foreign Trade Zones/Free Ports -------------- 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 Areas (SCAs), which are located only in 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 production and employment objectives. The SCA program applies only to Tierra del Fuego Province. The government reduced some SCA benefits in the early 1990s. Most 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. -------------- A.11.f. Foreign Direct Investment Statistics -------------- The United States and Spain are the two largest sources of foreign investment in Argentina. U.S. investment is concentrated in financial services, agribusiness, energy, petrochemicals, food processing, household products, and motor vehicle manufacturing. Many U.S. firms have substantially written-down the value of their Argentine investments in response to the devaluation and pesification of previously dollar-denominated contracts. Five U.S. power companies elected to abandon their Argentine investments in 2003 and 2004, to reduce continuing losses. Other important sources of investment capital include Chile, Italy, France, U.K., Germany, Canada, and Japan. During a visit to Argentina by PRC President Hu Jintao in November 2004, public and private Chinese companies signed letters-of-intent for sizeable investments over the coming decade in Argentina,s transportation, hydrocarbons, mining, construction, telecommunications, and tourism sectors. Chinese investment in Argentina to date, however, has been relatively light. Important foreign investors in Argentina include AES, ALCAN, American Airlines, Barrick, Bell South, BP, Brahma, British BUENOS AIR 00000034 004 OF 004 Gas, Bristol-Myers, Bunge, Cargill, Carrefour, Cencosud, CDSI, Chevron-Texaco, CitiGroup, CMS, Coca-Cola, Crown Cork, Cyanamid, Daimler-Chrysler, Delta, Diamond Shamrock, Dow Chemical, Dupont, Duke Energy, Eastman Kodak, Eli Lilly, ExxonMobil, Federal Express, Fiat, Fleet-Boston, Ford, Four Seasons, France Telecom, General Electric, General Mills, General Motors, Gillette, HP, Hilton, Honeywell, IBM, John Deere, Kimberley Clark, Kraft, Lockheed-Martin, Marriott, McDonald's, Merck, Motorola, Nabisco, Pepsi, Petrobras, Peugeot, Pfizer, Philip Morris, PriceWaterhouseCoopers, Procter & Gamble, Renault, Repsol, Scania, Schering-Plough, Shell, Sheraton, Swift Armour, Squibb, TCI, Telefonica of Spain, Tyco Electronics, 3M, Toyota, Union Camp, United, United Technologies, UPS, Volkswagen, Wal-Mart, and Xerox. Argentine firms increasingly invested abroad during the 1990s (particularly in Brazil, Paraguay and Uruguay),although the country has remained a large net recipient of foreign direct investment. 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. GUTIERREZ