Identifier
Created
Classification
Origin
07BUENOSAIRES119
2007-01-24 13:49:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Buenos Aires
Cable title:  

ARGENTINA INVESTMENT CLIMATE STATEMENT 2007

Tags:  ECON EINV OPIC USTR AR 
pdf how-to read a cable
VZCZCXYZ0005
RR RUEHWEB

DE RUEHBU #0119/01 0241349
ZNR UUUUU ZZH
R 241349Z JAN 07
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 7043
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUEHAC/AMEMBASSY ASUNCION 5879
RUEHMN/AMEMBASSY MONTEVIDEO 6099
RUEHSG/AMEMBASSY SANTIAGO 0102
RUEHBR/AMEMBASSY BRASILIA 5721
RUEHSG/AMEMBASSY SANTIAGO 0103
RUEHLP/AMEMBASSY LA PAZ JAN SAO PAULO 3118
RUEHRI/AMCONSUL RIO DE JANEIRO 2118
UNCLAS BUENOS AIRES 000119 

SIPDIS

SIPDIS
SENSITIVE

EB/IFD/OIA FOR WSCHOLZ, MTRACTON
WHA FOR WHA/BSC AND WHA/EPSC
E FOR THOMAS PIERCE
PASS NSC FOR JOSE CARDENAS
PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE
PASS USTR FOR EEISSENSTAT, SCRONIN, MSULLIVAN
TREASURY FOR AFAIBISHENKO, NLEE
USDOC FOR 4322/ITA/MAC/OLAC/PEACHER
US SOUTHCOM FOR POLAD

E.O. 12958: N/A
TAGS: ECON EINV OPIC USTR AR
SUBJECT: ARGENTINA INVESTMENT CLIMATE STATEMENT 2007

UNCLAS BUENOS AIRES 000119

SIPDIS

SIPDIS
SENSITIVE

EB/IFD/OIA FOR WSCHOLZ, MTRACTON
WHA FOR WHA/BSC AND WHA/EPSC
E FOR THOMAS PIERCE
PASS NSC FOR JOSE CARDENAS
PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE
PASS USTR FOR EEISSENSTAT, SCRONIN, MSULLIVAN
TREASURY FOR AFAIBISHENKO, NLEE
USDOC FOR 4322/ITA/MAC/OLAC/PEACHER
US SOUTHCOM FOR POLAD

E.O. 12958: N/A
TAGS: ECON EINV OPIC USTR AR
SUBJECT: ARGENTINA INVESTMENT CLIMATE STATEMENT 2007


1. This cable transmits the text of the Argentina
Investment Climate Statement for 2007

OPENNESS TO FOREIGN INVESTMENT

Argentina remains open to foreign investment. Four
consecutive years of real GDP growth over 8 percent have
attracted considerable U.S. and other international
investor interest in exploring opportunities in the
Argentine market. The government of Argentina, in turn,
has signaled its desire to see foreign direct investment
(FDI) expand significantly to enhance the nation?s
productive capacity and sustain high levels of real GDP
growth. However, legal uncertainties concerning creditor
and contract rights and frequent and unpredictable
regulatory changes diminish the attractiveness of some
sectors for foreign investors.

In 1991, the government of Argentina (GoA) pegged the
Argentine peso to the U.S. dollar at a 1:1 exchange rate
(?convertibility?) with the aim of breaking the back of
hyperinflation and adopted far-reaching market-based
policies, including dismantling a web of protectionist
trade and business regulations, and reversing a half
century of statism by implementing an ambitious
privatization program. Argentina subsequently received
significant increases in investment, with FDI inflows among
the highest in Latin America through most of the 1990s.
While convertibility defeated inflation, over time its
permanence, combined with lack of fiscal discipline and
poor governance, undermined Argentina's export
competitiveness and created chronic deficits in the current
account of the balance of payments, which were financed by
massive borrowing. The contagion effect of the Asian
financial crisis of 1998 precipitated an outflow of capital
that contributed to a 4-year recession that culminated in a
financial panic in November 2001. In December 2001, the
government ended convertibility and defaulted on $82

billion in debt, the largest sovereign debt default in
history. A number of bondholders are actively seeking
redress.

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. Argentina owes approximately $7.2 billion to
official government creditors (including $359 million to
the U.S. government),of which over $3.5 billion consists
of arrears and past due interest. The GoA has indicated
interest in normalizing its relationship with official
government creditors. As of this writing, however, the GoA
has declined to deal with private bondholders who chose not
to participate in the 2005 restructuring.

The surge in Argentina?s real GDP growth over the past four
years was largely due to a boost in domestic aggregate
demand stimulated by the government?s fiscal, monetary and
income distribution policies. Argentina posted real GDP
growth of 8.8 percent in 2003, 9.0 percent in 2004, 9.2
percent in 2005, and an estimated 8.4 percent in 2006.
This impressive economic recovery, which has led to
improvements in key socio-economic indicators, can be
attributed to a number of factors. First, following
reforms in the 1990s, Argentina?s economy was fundamentally
sound except for the high level of indebtedness. Second,
the move away from convertibility combined with favorable
international commodity price, interest rate and global
growth trends were catalytic factors in supporting


Argentina's growth. Third, the government has worked hard
to maintain a primary fiscal surplus and continues to
accumulate reserves. Argentina should continue to perform
well in 2007 with GDP growth projected in the 7 percent
range. Nevertheless, slowness in addressing the post-
crisis re-negotiation of public service contracts, capacity
constraints, potential energy shortages in the face of high
growth and distorted energy prices, inflation and the
government's policies to contain it (including pressure on
the private sector to maintain price controls) pose
potential obstacles to sustaining Argentina?s economic
recovery.

Industrial activity has performed well, growing from 16
percent of GDP in 2001 to 23 percent in 2005. Illustrative
of this industrial expansion, in 2006 the domestic car
industry had its best year since 1998, with production up
35 percent from 2005 to an estimated 432,100 units and
automotive exports, which comprise about 55 percent of
total production, up 30 percent from 2005 to an estimated
236,800 units. Meanwhile, tourism continued its strong
growth, with Argentina receiving an estimated 4.1 million
foreign tourists in 2006, also a record.

Argentina?s economic expansion continues to create jobs,
and unemployment continues to decline, down from 21.5
percent during the 2002 economic crisis to 10.2 percent
during the third quarter of 2006. Investment in real terms
is forecast by the Central Bank to have jumped 18.3 percent
in 2006. The recovery?s strong impact on government
revenue collections combined with a boost in the
consolidated tax burden from 21 percent of GDP in 2000 to
31 percent in 2006 allowed the consolidated primary fiscal
surplus to reach 3.6 percent of GDP in 2006, and the
surplus after interest payments was 2.0 percent of GDP.
However, recent substantial increases in federal and
provincial public spending may reduce or eliminate the
consolidated fiscal surplus in coming years.

Meanwhile, the move from convertibility to a managed float
exchange rate regime and high global commodity prices have
lifted exports to record levels and hefty surpluses in
Argentina?s trade and current account balance of payments.
These balance of payments surpluses have allowed an
accumulation of foreign exchange reserves which reached USD
32 billion at the end of 2006, almost 12 months of current
imports. In early 2006, the GoA used reserves to pay down
its $9.5 billion of debt with the IMF.

Argentina?s Central Bank has managed monetary and currency
policy in support of the economic expansion and maintaining
low real interest rates. Such policies have also
contributed to substantial inflationary pressures. To help
control inflation, the government has frozen key public
utility tariff rates since 2002 and, since 2005, has
negotiated price stabilization agreements on a sizeable
basket of essential consumer goods. As a result, reported
consumer inflation dropped from 12.3 percent in 2005 to an
estimated 9.8 percent in 2006. However, real core
inflation remains several points higher than indexed
inflation.

Private sector bank balance sheets, which deteriorated
significantly during the economic crisis, are recovering,
with improving levels of liquidity, net exposure to the
public sector significantly reduced, and credit ? primarily
to the private sector -- increasing at a faster pace than
nominal GDP growth. Most private banks have returned to
solvency, both in terms of profitability and quality of


portfolio. The ratio of non-performing loans has fallen to
a historic low of approximately 5 percent, and profits for
the overall banking system are at the highest levels in
over a decade. However, new lending is mostly short-term,
as access to long-term financing is limited and borrowers
are reluctant to borrow long-term at variable rates.
Uncertainty about the levels of long-term inflation will
continue to complicate GoA and private sector efforts to
develop a long-term fixed interest rate market, without
which it will be difficult to deepen Argentina?s mortgage
market or engage in large-scale project finance.

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
exports, assets, financial transactions, and property and
payroll (social security and related benefits). In June
2003, Argentina announced that it would review more closely
the tax declarations of foreign corporations operating in
Argentina. The professed aim of this measure is to crack
down on the use of offshore shell corporations to shelter
profits and assets from taxation.

The GoA has established a number of investment promotion
programs. Those programs allow for VAT refunds and
accelerated depreciation of capital goods for investors
(although numerous investors have reported difficulties and
delays in obtaining expected VAT refunds); offer tariff
incentives for local production of capital goods; and
include sectoral programs, free trade zones, and a special
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/.

According to the World Bank?s latest ?Doing Business?
survey, Argentina in 2006 ranked 101 out of 175 nations


surveyed in overall ?ease of doing business,? down from 93
in 2005. The survey considered issues such as: starting a
business; dealing with licenses; employing workers;
registering property; getting credit; protecting investors;
paying taxes; trading across borders; enforcing contracts;
and closing a business.

CONVERSION AND TRANSFER POLICIES

Until the end of 2001, Argentine law offered a number of
protections for free capital and currency transfers. Law
21382, Article 5 (as implemented by Decree 1853/1993),
allows foreign investors to repatriate capital and remit
earnings abroad at any time. Article V of the United
States-Argentina BIT also provides for free, prompt
transfers related to investments. In the wake of the 2001-
2002 crisis, however, the GoA instituted and subsequently
modified an array of emergency transfer and currency
conversion restrictions. The number of new regulations and
the frequency of policy changes have generated considerable
uncertainty for investors. Fourteen U.S. investors have
submitted claims against the GoA to binding investor-state
arbitration under the BIT, making the case that measures
imposed by Argentina during the financial crisis that began
in 2001 breached BIT obligations.

The GoA Ministry of Economy and the Central Bank have
issued various new or revised foreign exchange transaction
regulations in an attempt to normalize the foreign exchange
market and to limit the peso's appreciation. In nominal
terms, the Argentine peso depreciated 70% in 2002,
following the financial crisis that began in December 2001.
The peso subsequently appreciated 15% percent against the
USD in 2003, and slightly depreciated by 1% in 2004, 2% in
2005, and 1% in 2006.

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. In June 2005, the government
further tightened capital controls through Decree 616/2005.
The decree increased the minimum holding period for capital
inflows from 180 to 365 days and established that some
capital inflows are subject to a 30 percent unremunerated
reserve requirement to be deposited in a local bank for 365
days. This deposit must be denominated in USD and the
proceeds cannot be used as collateral. The remaining 70
percent is free to be invested, but is subject to the 365-
day minimum holding period. Capital inflows related to
trade transactions, foreign direct investment or to primary
public offerings of stock or bonds (from both the private
and public sector) as well as inflows from International
Financial Institutions are exempt from controls. Decree
616 differentiated from previous regulation as it attempted
to discourage capital inflows by increasing the cost of
bringing capital into the country.

A resident individual or company is allowed to purchase up
to USD 2 million per month of foreign currency without
Central Bank authorization. Any excess is subject to the
restrictions (e.g. 30 percent reserve requirement and 365-
day minimum investment period). In December 2006, the
Central Bank established that capital inflows and outflows
must be registered under a person?s or business? name,
whereas in the past transactions could be registered
generically under the local brokerage/exchange house.
There are special rules regulating the purchase of foreign
currency to settle financial debt, and for the private


issuance of bonds denominated in foreign currency.

Decree 260/2002 lifted official conversion rates that had
been established in early 2002. With this decree, the
market determines the rate of exchange, with Central Bank
intervention, and subject to rules established by the
Central Bank. The Central Bank intervenes frequently in the
foreign exchange market, with the objective of maintaining
a competitive peso.

EXPROPRIATION AND COMPENSATION

Article 4 of the United States-Argentina BIT states that
investments shall not be expropriated or nationalized
except for public purpose upon payment of prompt fair-
market value compensation. However, some U.S. investors
claim the January 2002 pesification of dollar-denominated
contracts amounts to an effective expropriation of their
investments. A number of these investors have filed
international arbitration claims against the government of
Argentina.

DISPUTE SETTLEMENT

The GoA accepts the principle of international arbitration.
The United States-Argentina BIT provides for binding
international arbitration of investment disputes that
cannot be settled through amicable consultation and
negotiation between the parties. The government of
Argentina is a party to the International Center for the
Settlement of Investment Disputes (ICSID),The United
Nations Commission on International Trade Law (UNCITRAL),
and the World Bank's Multilateral Investment Guarantee
Agency (MIGA). Companies that seek recourse through
Argentine courts, however, may not also pursue recourse
through international arbitration.

In April 2003, the GoA issued Decree 926/2003, which
created two new agencies to carry out 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
Contracts" (UNIREN),which was created to serve essentially
the same function, but which is presided over jointly by
the Ministers of Planning and Economy. The other entity
created by Decree 926/2003 is the "Amicable Negotiations
Proceedings Body," which works under the Federal 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 33 pending cases involving
Argentina before the ICSID tribunal as of mid-December
2006, 32 percent of total pending ICSID cases with claims
amounting to USD 13.3 billion, 6.5 percent of projected
2006 GDP. Over the past two years several ICSID claimants
have suspended active claims to facilitate further
negotiation with the government.

In a December 2006 decision on the 2002 pesification
decree, the Supreme Court ordered banks to reimburse
depositors in local currency the total value of deposits
originally held in U.S. dollars that had earlier been
frozen. The decision also upheld the legality of this
pesification decree, which froze bank deposits and forcibly
converted dollar savings into devalued pesos. The ruling
ordered banks to compensate depositors at 3.08 pesos to the
dollar -- equal to the pesified deposits they would now
hold under the original decree, and applying a currency
conversion rate of 1.40 pesos per dollar, adjusts for
inflation and adds a 4 percent annual interest rate to be
applied retroactively since the pesification began.

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 including
minimum-content and other requirements. Special regimes
also apply to mining, oil and gas, and other natural
resource sectors. The special regimes allow producers to
keep all (as in the case of mining) or 70 percent of their
foreign exchange revenues off-shore (as in the case of oil
and gas, fisheries and forestry).

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 goods" 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.

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, in February 2002, the government
of Argentina established an extended moratorium prohibiting
financial institutions from foreclosing on delinquent
mortgages on primary residences. In November 2006, the
government of Argentina established a law that allowed
owners of primary homes of limited value to pay down their
dollar-based mortgages, at a below-market exchange rate of
1.8 pesos to the dollar.

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 an ongoing problem in Argentina's
intellectual property rights regime, and extension of
adequate patent protection to pharmaceuticals has been a
highly contentious bilateral issue. In 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. 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).
However, the government?s dedication of additional
resources to patent adjudication over the past three years
has substantially increased the number of patents issued,
including in the pharmaceutical area. 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 undercut their
ability to protect patented products through judicial
injunctions

Copyrights, Trademarks, Trade Secrets, and Semiconductor
Chip Layout Design: Despite the fact that Argentina?s
copyright law dates to 1930, it provides a generally good
legal framework to protect intellectual property such as
books, films, music, and software. However, the economic
crisis of 2002 led to an increase in the use of unlicensed
software and optical media. Piracy rates of CDs, DVDs and
software are all estimated at over 50 percent. Enforcement
continues to be sporadic and pirated products are widely
available in the market. That said, Argentine authorities
began in late 2004 to show signs of a more proactive
posture regarding product piracy. Specifically, the
government of Argentina passed laws designed to allow


authorities to mount undercover operations for the first
time; to electronically flag suspect shipments; to
facilitate the seizure and detention of suspect
merchandise; and to more frequently rotate customs
personnel, among other provisions. A January, 2005 law
which allowed Customs officials to seize shipments which
violate IP rights ? and detain them based on the
presumption of IP violations, pending a formal decision ?
was implemented in October, 2006. The government has also
improved the process for trademark registration, decreasing
the time needed and increasing the rate at which trademarks
are registered. Argentina has no specific law on trade
secrets, although penalties for unauthorized revelation of

SIPDIS
secrets are applied to a limited degree under commercial

SIPDIS
law. Argentina has signed the WIPO Treaty on Integrated
Circuits, but has no law dealing specifically with the
protection of layout designs and semiconductors.

TRANSPARENCY OF THE REGULATORY REGIME

During the 1990s, the GoA eliminated virtually all
restrictions on domestic and foreign trade of goods and
services, as well as on financial markets. These policies
increased competition in many industries and sectors.
Argentine authorities, including the Ministry of Economy
and a number of quasi-independent regulatory entities, have
also 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 debtors? 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 GoA announced in May 2002 that an emergency
decree passed in late 2001 had voided the presidential
decree that authorized oil and gas companies to keep 70
percent of their foreign exchange revenues offshore. This
decree formed the financial basis for most foreign
investment in the Argentine oil sector. The GoA?s
discovery that the decree had been voided inadvertently
months before came at a time when 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 GoA?s actions since 2003 have not calmed investor
concerns about the regulatory environment. The GoA 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 GoA took measures to avoid energy
shortages that arose from the increase in demand for
natural gas and electricity in 2004, including ordering
reductions in natural gas exports to Chile and electricity
exports to Uruguay; importing natural gas from Bolivia and
electricity from Brazil; raising tariffs for industrial


users; providing incentives to small users to save energy;
and intervening in the wholesale markets for natural gas
and electricity. The GoA has also encouraged companies to
invest in the expansion of natural gas pipelines, and has
encouraged power companies to invest compensation owed them
by the GoA in new power generation plants. There is
concern that the above mentioned GoA actions in the energy
sector, coupled with the GOA's efforts to control retail
prices of fuels, have created disincentives for companies
to invest in energy exploration and infrastructure.
Inadequate investment in those areas could, in turn, result
in energy supplies not keeping pace with demand generated
by Argentina's rapid economic growth.

In 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 three major taxes: an
income tax, export taxes imposed in 2002, a financial
transactions tax and a 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 years. Export taxes are
tariffs imposed on the export of all goods, with rates from
5 percent to 45 percent. The financial transactions tax
imposes a 0.6 percent on all checking account payments
within the national banking system. The VAT is set at 21
percent for most products. The VAT is 10.5 percent for
interest and commissions on debts taken by public
transportation companies, fruits, vegetables, honey,
newspapers and magazines, and some capital goods. The VAT
is 27 percent for natural gas, electricity, water and
sewage services. Exporters should receive VAT rebates, but
many companies have experienced extensive delays in their
receipt of VAT rebates.

At the provincial level, the system of provincial sales
taxes has encouraged vertical integration of firms.
Investors also have expressed increasing concern over the
incidence of municipal "supply taxes". The Argentine
constitution gives municipalities the right to set fees for
the services that they provide, including supply 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.

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, securities firms and investment funds are well
represented in Argentina and are 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 2001-2002 economic and
financial crisis. Following the government?s 2005 debt
restructuring private pension funds have again become
significant players in domestic capital markets. In July
2003, the government began requiring foreign banks to
disclose to the public the nature and extent to which their
foreign parent banks guarantee their branches or
subsidiaries in Argentina.

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.

In protest against the construction of a $1.2 billion pulp
mill on the Uruguayan side of a river that defines the
Argentine/Uruguay border, Argentine citizens have blocked a
bridge that connects the two nations for much of 2006. The
pulp mill project is being financed and insured by World
Bank agencies and has met all relevant World Bank
environmental safeguards. The Mercosur trade block?s
arbitral tribunal considered the case in 2006 and found the
block illegal and a violation of the right of free transit
of goods and services in the region. Nonetheless, the
Government of Argentina has refused to intervene, a
decision that has led to a deterioration of relations
between the two countries. Argentina asked the
International Court of Justice to issue an injunction
halting the plant?s construction, as well as its opinion on
whether construction of the plant violated a 1975
Argentine-Uruguayan treaty dealing with its shared river.
In mid-2006, the International Court refused to impose such
an injunction and is expected to render a final decision on
the case in 2007.

CORRUPTION

Government corruption and private sector business fraud are
the subjects of frequent complaints from U.S. investors.
U.S. businesses have identified corruption in Argentina as
a significant problem for trade and investment,
particularly in procurement, regulatory systems, tax
collection, and health care administration. In the latest


annual Transparency International survey of Corruption
Perceptions Index that ranks countries by their perceived
levels of corruption, Argentina ranked 93rd out of 163
countries, below the average among Latin American
countries, and far behind neighbors Chile and Uruguay.
Such surveys have contributed to more open debate in
Argentina about corruption and fraud. Some foreign firms
complain that their adherence to the letter of the tax and
regulatory codes places them at a competitive disadvantage
vis their domestic competitors. There are indications that
the GoA is trying to change the culture of tax evasion by
stepping-up enforcement efforts and encouraging the use of
credit card purchases while at the same time using the
media to increase public awareness of tax obligations and
to shame evaders. While Argentina?s growing economy is
primarily responsible for the government of Argentina?s
solid fiscal performance, anti-evasion efforts were a
factor in the federal government?s record tax collections
of about 150 billion pesos in 2006, up from around 118
billion in 2005 and 98 billion in 2004.

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. 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.

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.

At present, the GoA has signed and ratified bilateral
treaties for the protection and promotion of investment
with all of its major trade and investment partners. More
information regarding Argentina's bilateral tax and
investment treaties is available at www.infoleg.gov.ar.

Argentina has valid double taxation treaties with the
following countries: Australia, United Kingdom, Denmark,
Germany, Belgium, Austria, France, Italy, Sweden,
Switzerland, Spain, Canada, Chile, Bolivia, Brazil,
Finland, Norway, and the Netherlands. In addition thereto,
a number of treaties concerning the exemption of income
from international transport are in force.

OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS

The government of Argentina signed a comprehensive
agreement with the Overseas Private Investment Corporation
(OPIC) in 1989. The agreement allows OPIC to insure U.S.
investments against risks resulting from expropriation,
inconvertibility, war or other conflicts affecting public
order. OPIC programs are currently used in Argentina.
Argentina is also a member of the World Bank's Multilateral


Investment Guarantee Agency (MIGA).

LABOR

Argentine workers are among the more highly educated in
Latin America. Argentine workers were relatively well paid
by international standards prior to the peso devaluation in
January 2002. While high inflation following the 2002
devaluation significantly eroded the purchasing power of
wages, sustained government-promoted increases in public
and private sector nominal wage levels from 2003 have
reversed this trend. Wages in dollar terms remain
competitive, even taking into account Argentina's
relatively high social security charges and other taxes.
As of the third quarter of 2006, the official unemployment
rate was 10.2 percent, down form 21.5 percent in 2002, but
this number excludes recipients of government assistance to
unemployed heads of households. If those recipients were
included, unemployment would be approximately 12.1 percent.

Organized labor continues to play a strong role in
Argentina. Sector-specific negotiations between unions and
industry, although largely market driven, have often been
influenced by government suasion on behalf of unions. In
the 2002-2004 period, a number of general wage increases
were mandated by presidential decree.

With the unemployment rate projected to fall below 10
percent in 2007, numerous employers have commented on an
increasing shortage of skilled labor. The GoA passed a
modest labor reform law in 2000 to address rigidities in
the labor market (i.e., 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. According
to the World Bank?s ?Doing Business? survey mentioned
above, the cost of terminating an employee in Argentina
averaged 138 weeks of wages, almost double the Latin
American average of 59 and more than four times the OECD
average of 31.

FOREIGN TRADE ZONES/FREE PORTS

Argentina has two types of tax-exempt trading areas:
Foreign Trade Zones (FTZs),which are found throughout the
country; and the more comprehensive Special Customs Area
(SCA),which covers all of Tierra del Fuego Province and
whose benefits apply only to already established firms.

Law 24331 of 1994 establishes the FTZ regime for Argentina.
Argentine law defines an FTZ as a territory outside the
?general customs area? (GCA, i.e., the rest of Argentina)
where neither the inflows nor outflows of exported final
merchandise are subject to tariffs, non-tariff barriers, or
other taxes on goods. Goods produced within a FTZ generally
cannot be shipped to the GCA, unless they are capital goods
not produced in the rest of the country. The labor,
sanitary, ecological, safety, criminal, and financial
regulations within FTZs are the same as those that prevail
in the GCA. Foreign firms get national treatment in FTZs.



Under the current law, the Executive Power may create one
FTZ per province, with certain exceptions. More than one
FTZ per province may be allowed in sparsely populated
border regions (although this provision has not been fully
utilized). Thus far, the National Executive Power has
permitted FTZs in most of the 24 Argentine provinces. The
most active FTZ is in La Plata, the capital of Buenos Aires
Province.

Merchandise shipped from the GCA to a FTZ may receive
export incentive benefits, if applicable, only after the
goods are exported from the FTZ to a third country
destination. Merchandise shipped from the GCA to a FTZ and
later exported to another country is not exempt from export
taxes. Any value added in FTZs and re-exports from FTZ is
exempt from export taxes.

Law 19640, passed in 1972, codifies the Special Customs
Area (SCA) rules for Argentina. Unlike FTZ manufactured
goods, products manufactured in an SCA may enter the GCA
free from taxes or tariffs. In addition, the government may
enact special regulations that exempt products shipped
through an SCA (but not manufactured therein) from all
forms of taxation except excise taxes. The SCA program
provides benefits for established companies that meet
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. In late 2006, Economic Ministry
Resolution 776 abolished export tax exemption enjoyed by
oil companies operating in Tierra del Fuego Province.

FOREIGN DIRECT INVESTMENT STATISTICS

As of the end of 2005 (the latest date available),the
total stock FDI in Argentina was estimated at $55 billion,
with Spain, the United States and France the top three
investors. In 2005, the total FDI inflows were estimated
at $4.6 billion. The stock of U.S. FDI in Argentina in
2005 was estimated at $13.2 billion. U.S. investment is
concentrated in financial services, agribusiness, energy,
petrochemicals, food processing, household products, and
motor vehicle manufacturing. Many U.S. firms substantially
wrote down the value of their Argentine investments in
response to the devaluation and pesification of previously
dollar-denominated contracts.

Other important sources of investment capital include
Canada, Mexico, U.K., Italy, Chile, the Netherlands and
Germany. 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.

In 2005, Argentina received 1.4 percent of foreign direct
investment (FDI) inflows to developing countries, and 5.9
percent of FDI inflows to Latin America. Both of these
shares are well below Argentina's average FDI share from
the pre-crisis 1992-2000 period.

Argentine firms increasingly invested abroad during the
1990s (particularly in Brazil, Paraguay and Uruguay),


although the country has remained a net recipient of
foreign direct investment.

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.
WAYNE