PERU: 2006 REPORT ON INVESTMENT DISPUTES AND

UNCLAS LIMA 002173

SIPDIS

SIPDIS

DEPT FOR WHA/AND, WHA/EPSC, EB/CBA, EB/IFD/OIA, L/CID
TREASURY FOR OASIA/INL
COMMERCE FOR 4331/MAC/WH/MCAMERON
USTR FOR BHARMAN

E.O. 12958: N/A
TAGS: EINV ECON ETRD PGOV PE
SUBJECT: PERU: 2006 REPORT ON INVESTMENT DISPUTES AND
EXPROPRIATION CLAIMS

REF: STATE 60294

This is Post's response to Reftel, a request for input on
outstanding Investment Dispute and Expropriation Claims.

The US Government is aware of seven (7) claims that may be
outstanding against the Government of Peru. Since 2004, 4
cases - Claimants D, E, J, and M - have been resolved and
should be removed from the report. Post also recommends the
removal of 5 cases - Claimants C, F, K, L and O - due to
continued lack of involvement by the claimants.


1. a. Claimant A

b. 1999

c. Claimant A's Peruvian subsidiary was a major
purchaser of Peruvian gold in the late 1990's. In
1999, the GOP issued a decree that made the final
purchaser of gold responsible for verifying the
legality of the supply chain from mine to export in
order to receive the refunds of value-added tax (VAT)
allowed under law. On the basis of this decree,
applied retroactively, and in the context of a broader
investigation into the loss of up to $150 million, the
GOP tax authority, SUNAT (Superintendencia Nacional de
Administracion Tributaria),charged that claimant's
subsidiary had participated in a scheme to defraud the
GOP by falsifying gold purchases. SUNAT failed to
refund VAT payments and, in December 1999, executed
letters of guarantee worth a combined $28 million put
up by Claimant A to secure early payment of the
refunds. Claimant A denied the accusations and filed
an administrative appeal, which was later appealed to
Peru's tax court. Subsequently, the GOP filed criminal
charges against executives of claimant's Peruvian
subsidiary.

On February 4, 2003, the tax court ruled against
Claimant A, upholding SUNAT's resolution to withhold
the $28 million amount. The tax court ruling did not
cite any direct evidence of specific misdeeds by
Claimant. However, SUNAT contends that transactions
within Claimant's gold supply chain were simulated and
that the company was in a position to know of the
irregularities and wrongdoings of suppliers.

Claimant A asserts that GOP corruption caused the
execution of the letters of credit and the filing of
criminal charges. Claimant A argues that it should not
be liable for any possible wrongdoing by its gold
suppliers.

The judge in claimant's tax case issued a decision in
May 2004 that threw out previous SUNAT and Tax Court
rulings against the company. The court found that
claimant cannot be held responsible for the irregular
actions of third parties and that the GOP improperly
seized the company's letters of credit in 1999. The
GOP then appealed this decision. The Superior Court,
which heard the appeal, issued a split 2-1 decision in
March 2005, ruling in favor of Claimant A. However,
Peruvian law dictates that the winning side must have a
minimum of three votes in its favor. An additional
judge was assigned to the case in March 2005. After a
hearing in April 2005, the new judge ruled in favor of
the GOP, tying the vote at 2-2. A fifth judge has been
assigned to the case. The Court issued a 3-2 decision
against Claimant A in August 2005.

Claimant appealed to the Constitutional Court. In
January 2006, the Constitutional Court ruled 5-1
against claimant. Claimant is considering taking the
dispute to the Inter-American Court in Costa Rica.

In the criminal case involving claimant's executives

(lumped together with more than 200 other defendants),
the government prosecutor requested that the judge
extend the period to investigate the case (adding 60
more days on to an investigative stage that has
lingered for 3.5 years). In August 2005, the public
prosecutor proposed the dismissal of the case against
the claimant's executives. The Court sent the case
file back to the prosecutor in February 2006 to amend
formal errors before making a decision. In April 2006,
the prosecutor resubmitted his recommendation to the
Criminal Court to dismiss the case against the
Claimant's executives. The Criminal Court will
schedule a hearing for August or September, and should
issue its ruling by December.

At Claimant's request, Embassy has engaged repeatedly
with senior GOP officials since 1999 regarding this
case.



2. a. Claimant B

b. 1999

c. Claimant B also is involved in a dispute with the
GOP regarding the refund of value-added tax on gold
exported from Peru between May 1997 and February 1999.
SUNAT, the tax agency, has withheld roughly $600,000
that claimant contends it is entitled to receive as a
tax refund. The Tax Court issued a decision in
Claimant B's case to wait until a parallel criminal
case against Claimant B's local general manager is
resolved. The company has appealed this decision,
arguing that the Tax Court had all the necessary
information to make a ruling and that such a position
creates undue delay. The Superior Court, which heard
the appeal, issued a split 2-1 decision in March 2005
in favor of the government. However, Peruvian law
dictates that the winning side must have a minimum of
three votes in its favor. An additional judge was
assigned to the case and the Superior Court held a
hearing on May 24, 2005. The new judge ruled in favor
of Claimant B, tying the vote at 2-2. A fifth judge
was assigned to the case and the Court held another
oral hearing on June 15, 2005. In August, the Court
issued its decision, 3-2 against Claimant. Claimant
appealed the case to the Constitutional Court, seeking
to overturn the ruling of the Tax Court, which
refrained from issuing a resolution until after the
criminal case concludes.

The criminal case against Claimant B's local general
manager is the same one that involves Claimant A's
executives. The Public Prosecutor did not recommend
that the case against Claimant B's executive be
dropped.

In the September 2002 ATPDEA commitment letter, the GOP
pledged to resolve this case promptly, ensuring due
process and transparency. In communications with GOP
officials, USTR has set progress in the resolution of
this dispute as a key factor that will determine
whether Peru is included in the potential free trade
agreement (FTA) that is sent to Congress.



3. a. Claimant C

b. 1989

c. Peru's Supreme Court ruled in December 1989 that
ships belonging to Claimant C had been illegally seized
by Peruvian Customs in 1985, and that Claimant C is due
financial compensation. However, the amount of that
compensation is now the subject of a series of court
actions involving the Ministry of Economy and Finance

(MEF). MEF contested the legality of Claimant C's
claim, stating that the statute of limitations had
expired. The court ruled on March 12, 2004, against
the company on the statute of limitations issue.
Claimant C has appealed this decision to the Superior
Court, which was scheduled to start hearing the case by
August 2004. An independent legal analysis requested
by the Embassy suggested that the lower court ruling
was within the bounds of Peruvian law.

Claimant C passed away in early 2005. His wife has
since moved to the United States and is no longer
seeking Embassy advocacy on this case.



4. a. Claimant D

b. 2001

c. This case was resolved in May 2004. Peru's
telecommunications agency, OSIPTEL, sponsored
competitive bidding for a subsidized, rural telephone
network contract in September 2000. Foreign bidders
were required to form a consortium with a Peruvian
partner. On September 28, 2000, OSIPTEL announced that
Claimant D and its Peruvian partner had submitted the
lowest bid (about $27.8 million) for a subsidy. The bid
submitted by Claimant D and its partner was
approximately $10 million less than the second-place
bid. OSIPTEL issued an official resolution (a "Buena
Pro") declaring Claimant D's consortium to be the
winner.

To finalize the contract, Claimant D's partner was
required to obtain a concession from the GOP, which the
Claimant alleges should have been automatic. The GOP
refused to do so, citing indictments against the owners
of the Peruvian partner firm. The GOP awarded the
concession to the second-place bidder in 2001, allowing
the second-place firm to reduce its bid by $10 million
to match claimant's bid. Claimant D alleged that the
decision to award the concession to the second-place
bidder was prompted by that bidder's close contacts
with former senior GOP officials. Claimant D alleged
that the GOP violated several of Peru's own laws and
regulations.

Working on the basis of guidance from the Department,
Embassy officers engaged actively with GOP officials to
encourage the GOP to investigate the claimant's
allegations and to consider an out-of-court settlement.
This case was resolved in May 2004 when Claimant D
received a settlement from the second place bidder of
$450,000.



5. a. Claimant E

b. 2002

c. This case was resolved in 2005. In 1997, the
Ministry of Transportation procured a radar system from
Claimant E under a turnkey contract. The system became
operational in 1998 and, in July 2002, Claimant E
sought to close out the contract based upon a
satisfactory evaluation of the radar, as mandated by
the agreement. The GOP refused to close the contract,
arguing that the system did not function properly and
that Claimant E had not fulfilled its obligations. In
a possible breach of contract, the GOP ordered its bank
to collect from a $6 million performance bond posted by
Claimant E before negotiations to settle this dispute
could begin. That bond drawdown order was stopped by a
temporary injunction granted by a New York court in
August 2002.

Claimant E and the GOP reached agreement in April 2004
on rules for submitting this dispute to local
arbitration in Peru. The parties initiated the
arbitration procedures on June 1, 2004. The
arbitration panel issued its 3-0 decision on June 16,
2005, in favor of the GOP. Claimant E is paid the GOP
$500,000 in damages and the GOP will issue a statement
absolving Claimant E from future obligations. The GOP
returned the bond to Claimant E.



6. a. Claimant F

b. 1999

c. In October 1999, the GOP's forestry and parks
authority, INRENA, obtained an emergency decree halting
the movement of logging equipment and lumber in several
of Peru's jungle provinces. INRENA shut down a logging
operation in which Claimant F had invested $2 million
and seized lumber intended for export to Claimant F.
The GOP alleged that the Peruvian company was engaged
in illegal logging. Claimant F denied the charges,
asserting that the GOP's actions were intended to put
Claimant F's partner out of business. Claimant F and
its Peruvian partner have waged a legal battle in Peru
against INRENA since then. Claimant F has not sought
Embassy assistance since 2002.



7. a. Claimant G

b. 1970

c. Claimant G signed an agreement with the GOP in
1953 to build roads in rural Peru in exchange for one
million acres of land. Claimant G began developing a
first installment of 60,000 hectares, but a military
government expropriated the land in the 1960s.
Claimant G filed suit. In 1971, the Peruvian Supreme
Court ruled that the GOP had to pay Claimant G for the
roads he had built.

In its September 2002 ATPDEA commitment letter, the GOP
noted that the judiciary had recognized Claimant G's
right to indemnity for the road construction, the value
of which needed to be determined through further
proceedings. The GOP further pledged to "ensure a
transparent and prompt resolution."

In March 2004, the GOP issued a supreme decree
establishing a special commission to negotiate a
settlement with Claimant G. The commission and
Claimant G's attorneys have met three times in Lima,
but the two sides failed to agree on a final
compensation figure before the mandate of the
Commission expired.

Claimant G met again with GOP officials in 2005 to
discuss the methodology for establishing the market
value price for the work done in 1968. The GOP
proposed that Claimant H agree to a new independent
appraisal to determine the base amount of compensation.
Claimant G agreed in principle, but the GOP refused to
compensate Claimant G in one lump sum.

In May 2005, the GOP found an official document from
Claimant G in an archived Ministry of Agriculture file
that claims the total value of the work completed in
1968 was $865,000. According to the GOP, using a
mixture of Treasury bonds and bills, the current-day
value would total approximately $10 million. Claimant
G asserts that the document was not a complete
assessment of work completed.

On March 30, 2006, Claimant G accepted the Peruvian

Government's offer of compensation. The GOP is still
working to budgetary approval from the Peruvian
Congress.



8. a. Claimant H

b. 2001

c. Peruvian tax agency SUNAT served Claimant H in
November 2001 with a $49 million tax assessment. SUNAT
claimed that Claimant H's local power company under
previous ownership underpaid taxes from 1996-1999 due
to improper use of depreciation after the privatization
of the power company. Claimant H purchased the
privatized company in 1999. The power company was
privately audited from 1996-1999, and its financial
statements for those years were approved by GOP
representatives on the company's board and by the GOP
privatization agency.

In December 2001, Claimant H filed an administrative
claim against the tax assessment. In September 2002,
SUNAT upheld its assessment but reduced the amount to
$43 million. In late September 2002, Claimant H
appealed this decision to the Tax Court. The pending
assessment against Claimant H now totals more than $50
million with interest. The Tax Court issued in May
2004 a decision disagreeing with the method of
depreciation employed by the company and asking SUNAT
to recalculate its assessment. Parallel to these legal
proceedings, Claimant H and the GOP submitted this case
to international arbitration in 2004. Claimant H
argues that SUNAT's reassessment violates a Legal and
Tax Stability Agreement between Claimant H and the GOP.

This case is pending a decision in international
arbitration.



9. a. Claimant I

b. 2003

c. In December 2003, tax agency SUNAT assessed Claimant I
$9 million in fines and reduced its income tax credit for
1998 from 32 million Soles (Peruvian currency) to 9 million
Soles. The assessment was based on SUNAT's claim that
Claimant I's 1997 merger with a local metal refining company
had no economic substance. Claimant I believes the merger
was done correctly and that its receipt of applicable tax
benefits was in strict compliance with existing Peruvian
law. Claimant I contends that the economic substance of the
merger has been clearly demonstrated. In December 2004,
SUNAT, after reviewing Claimant I's 1999-2001 income taxes,
assessed the company with additional fines. As of December
31, 2005, Claimant I's tax liability for the 1998-2001
assessments was estimated to be more than $110 million.

In February 2006, Claimant I hired CONATA, the Peruvian
state-owned appraisal agency, to evaluate 10 percent of
the company's holdings as a test. The results were
lower than Claimant I's own appraisal by 30 percent.
According to Claimant I, the CONATA appraisal valued
the company's assets individually (as one would do in a
liquidation) rather than as part of an integrated
profitable enterprise. Claimant I in May 2006
requested that CONATA conduct an integral assessment.

There is also a growing backlog of VAT refunds due to
Claimant I, dating from mid-2004. In September 2004,
as a result of Claimant I's request for a VAT credit,
SUNAT conducted a full audit of the company's January-
July 2004 tax documents, inquiring why the company did
not pay VAT on some zinc and copper sales. In November
2004, SUNAT assessed that Claimant I owed more than

$2.2 million in back VAT payments and offset this
amount against the refund for VAT credit. SUNAT then
began an audit of Claimant I's VAT documents dating
from 1999-2001. As of December 31, 2005, the company
has an assessed VAT liability of $44 million for the
years 1999-2001. In January 2006, SUNAT began another
tax audit of Doe Run, this time for the 2002-2003
period. This audit is still in process. While the
audits continue, SUNAT refuses to grant Claimant I's
credit on VAT refunds, which total more than $100
million.



10. a. Claimant J

b. 2001

c. This case was resolved in September 2005. Claimant
J is a local power company majority-owned by two US
energy companies. Claimant J signed a ten-year legal
and tax stability agreement with the GOP in 1994. Tax
agency SUNAT disputed the company's continued use after
1999 of accelerated depreciation, which was permitted
under Peruvian law for companies that underwent
reorganizations. The issue initially went to
arbitration and a parallel Tax Court proceeding.
Claimant J won in both instances, but SUNAT was
permitted to revisit the case. In July 2003, SUNAT
assessed claimant with $56 million in back taxes due
since 1999. Claimant J again appealed the SUNAT
assessment to the Tax Court, which ruled in February
2004 that Claimant J had a right to revalue assets and
that there should be no assessments for the years 1996-

1998. The Tax Court, however, asked SUNAT to review
the 1999 assessment again; SUNAT concluded Claimant J
overvalued its assets to reduce its tax burden.

After another appeal by Claimant J, the Tax Court in
late January 2005 directed GOP agency CONATA (a state-
owned valuation firm) to conduct a new assessment of
Claimant J's 1994 assets. The Tax Court issued a
ruling on July 26 instructing SUNAT to utilize the
CONATA assessment to resolve the dispute. SUNAT
determined that Claimant J owed approximately $282,000
in back taxes and interest through 1999. The company
paid the amount in September 2005. SUNAT also agreed
to not appeal the Tax Court decision that prevented the
agency from reopening the 1996-1997 tax years.



11. a. Claimant K

b. 1970

c. Following receipt of a letter from Congressman
Silvestre Reyes (Texas) concerning Claimant K's case in
December 1999, Embassy received a letter from Claimant
K in February 2000 and met with claimant at his request
while he was visiting Peru in May 2000. According to
Claimant K, in about 1970, Peru's military government
expropriated his farm as part of a general land reform
act that expropriated farms over 250 hectares.
Claimant's farm, however, is just under 200 hectares.
Claimant K was issued compensation bonds, which have
since become worthless as the result of hyperinflation.
Claimant K asserts that, because he believed the
expropriation to be illegal and because he was living
in the United States at the time, he made no attempt to
redeem the bonds. Claimant K has provided no estimate
of the land's current value, maintaining that his goal
is to have it returned.

Claimant K began efforts to recover his farm in 1999.
At Embassy's suggestion, he joined an association
composed of others whose land was expropriated.
Claimant K has also contracted legal counsel in Peru,

but has not separately pursued remedies through the
Peruvian courts.

Embassy Officers met with Claimant K in 2000, and were
in contact with Claimant K on one occasion in 2001.
Embassy officers have requested details on the
expropriated property, a timeline of events related to
the expropriation, and any legal analysis supporting
the Claimant's assertion that the expropriation did not
comply with Peruvian law. To date, Embassy has not
received this information. Post has had no contact
with claimant since July 2001.



12. a. Claimant L

b. 1976

c. According to Claimant L, pursuant to the Agrarian
Reform Law, the Peruvian Agriculture Ministry (MinAg)
in 1976 transferred about 60 hectares of land he had
purchased in 1964 to the Comunidad Campesina de Oyon
(CCO),located in the district and province of Oyon in
the department of Lima. MinAg allegedly did so without
his knowledge and without notifying him of the action.

Claimant L hired a lawyer to undertake administrative
procedures for recovering his land in 1976, but the
claim was lost, and in May 2000 MinAg found that his
claim had no merit. He appealed administratively and
also received a letter in November 2000 from the Huaura
Superior Court indicating that the GOP's General Office
of Agrarian Reform had mistaken him for another
landholder with a similar name. Simultaneously,
Claimant L filed suit against local mining firm
Buenaventura, which Claimant L asserts took advantage
of the title dispute to cut down all of the trees on
what was wooded land. Claimant L also says that the
dispute led to threats against him from the CCO, and
that terrorist activity in the area prevented him from
returning to his land until 1990.

Claimant L sent Embassy documents in November 2000
related to the alleged expropriation of his land. At
Embassy's request Claimant L provided a brief letter
laying out the facts of the case in March 2001.
Embassy forwarded this letter to MinAg, with a request
that it be given appropriate attention. The Ambassador
received a letter dated May 6, 2002 from MinAg,
confirming that the land had been transferred under the
agrarian reform program to the CCO on June 19, 1976,
and that title had been confirmed to the CCO on
November 8, 1982. MinAg asserts that, as a result,
Claimant L only has a right to claim the fair market
value of the land, and must pursue this through the
courts.

Claimant L has not contacted the Embassy for assistance
since 2002.



13. a. Claimant M

b. 2001

c. This case was resolved in January 2006. Claimant M
entered into a consulting services agreement with
PRONAP (now PARSSA) to provide design services for
potable water supply and wastewater system. During the
performance of the contract, Claimant M performed
additional work at the direction of PRONAP but has yet
to receive payment. Claimant initiated arbitration in
June 2001 in order to recover the costs of this
additional service. In March 2004, the arbitration
panel found in favor of Claimant M and ordered PARSSA
to pay approximately $1.5 million. PARSSA disagreed

with the arbitration decision, claiming that the
arbitration panel was neither independent nor
impartial, as PARSSA was not involved in the process of
determining the arbiters. PARSSA appealed to the
Judiciary in April 2004, requesting an annulment of the
arbitration decision.

In August 2005, the Judiciary issued its ruling in
favor of Claimant M, denying a GOP appeal to reject the
binding arbitration. The court ordered PARSSA to pay
the amount owed, which with interest could total
approximately $3 million. On September 2, the Ministry
of Housing appealed the August ruling in favor of
Claimant, claiming there were irregularities in the
handling of the arbitration case. Claimant formally
appealed the submission of the case in October 2005,
citing a mid-July Supreme Court Directive that
instructed the Judiciary to not overturn arbitration
decisions.

After Embassy advocacy on Claimant's behalf, the
company received a $1.9 million partial payment for its
arbitration award on December 23. In early January,
Claimant received a second payment of $600,000.
Claimant M and the GOP continue to negotiate the final
payment of the remaining $141,000 in legal fees.



14. a. Claimant N

b. 2004

c. According to the Claimant, SUNAT announced in
October 2004 that it was levying taxes for fuel
supplied to outbound international carriers and would
be collecting these taxes on sales (IVG) for the past
four years (2000-2004). For Claimant N, these back
taxes amounted to $15 million.

The GOP, in an effort to resolve the problem, passed a
new tax law in January 2005 that classified future
sales of fuel for international transport (air and sea)
as exports, exempting the sales from IVG. The law,
however, failed to make the tax exemption retroactive.
The Ministry of Finance, working with Claimant N,
drafted an amendment to the new tax law that would
retroactively grant companies an IVG credit for
previous sales of fuel for international transport.
The Peruvian Congress voted in favor of this law in
October 2005.

While the Congress passed the law, SUNAT claimed that
it was not retroactive and therefore Claimant N could
not claim a credit on its $15 in back taxes. To
rectify the situation, the Ministry of Finance is
drafting a regulation to be passed by Congress to allow
for retroactive credit of the back taxes.



15. a. Claimant O

b. 2000

c. Claimant provides telecommunications services over
the world's first integrated global Internet protocol
based network and has deployed a sub-sea fiber optic
network around South America. The submarine fiber and
transmission equipment sit on the ocean floor more than
12 nautical miles from shore, except where a cable
system lands in a country to connect that country to
the worldwide network.

Tax agency SUNAT conducted an assessment of Claimant
O's assets. Per SUNAT's request, Claimant O paid
customs duties and VAT on all goods imported into Peru,
including for equipment extending 12 nautical miles

from Peru's coast. In November 2000, SUNAT re-assessed
Claimant O's property and imposed $43 million in
additional duties and VAT, based on an assessment of
equipment located between 12 and 200 nautical miles
from the coast of Peru. Claimant O has appealed the
reassessment.

Claimant O has not contacted the Embassy for advocacy
since 2005.

Note: In 2003, a Singaporean Company purchased
Claimant O, but Claimant maintains its headquarters in
the United States. Post advocated on behalf of the
company based on US national interest.



16. a. Claimant P

b. 1996

c. Claimant P purchased an existing light
manufacturing facility in 1994 and began operations the
same year. Although the company complied with all
district regulations and received all necessary
permits, the city of Lima, the governing municipality,
continues to refuse to finalize the permitting and
registration process for the facility on the grounds
that it is located in an environmentally sensitive
area.

Claimant presented its permits and details of the plant
to the District Government on June 6, 2005. The
district government has one month to make a decision.
Once it makes a decision, it will forward the paperwork
to the Lima Provincial Government for its
consideration.

If the Municipal Government refuses to recognize the
Claimant's permits, the company could be forced to
move, which would cost approximately $3.7 million.



17. To our knowledge, none of the following have signed
Privacy Act Waivers. The companies are as follows:

Claimant A - Engelhard
Claimant B - Princeton Dover
Claimant C - Big 3 Marine
Claimant D - STM Wireless
Claimant E - Northrop Grumman Corporation
Claimant F - Newman Lumber
Claimant G - Mr. Roy LeTourneau, U.S. Citizen
Claimant H - Duke Energy
Claimant I - Doe Run
Claimant J - Luz del Sur
Claimant K - Dr. Jaime Muro-Crousillat, U.S. Citizen
Claimant L - Mr. Manuel A. Vizurraga, U.S. Citizen
Claimant M - Parsons
Claimant N - Exxon Mobil
Claimant O - Global Crossings
Claimant P - Kimberly Clark

STRUBLE