TUNISIA: INVESTMENT CLIMATE STATEMENT 2007

UNCLAS SECTION 01 OF 07 TUNIS 000141 SIPDIS SIPDIS STATE FOR NEA/MAG (HARRIS) AND EB/IFD/OIA (HATCHER AND KAMBARA) STATE PASS USTR (BELL),USPTO (ADLIN AND ADAMS),USAID (MCCLOUD) USDOC FOR ITA/MAC/ONE (NATHAN MASON),ADVOCACY CTR (JAMES), AND CLDP (TEJTEL) CASABLANCA FOR FCS (ORTIZ) LONDON AND PARIS FOR NEA WATCHER E.O. 12958: N/A TAGS: EINV EFIN ETRD ELAB KTDB OPIC USTR TS SUBJECT: TUNISIA: INVESTMENT CLIMATE STATEMENT 2007 REF: 06 STATE 178303 PART II OF TUNIS 140 ¶25. The Government of Tunisia has a good record in recent years of dealing with disputes involving US companies, although the government?s 1995 seizure of a US commercial consignment was eventually settled without compensation. In 1999 a Tunisian court ruling originally prevented a US investor from exercising his managerial authority as the majority shareholder in a Tunisian company, but this case was eventually settled in the Tunisian Supreme Court in favor of the US investor. In 2001 a US company was awarded damages by a Tunisian court against its Tunisian representative for illegal registration of trademarks owned by the US manufacturer. -------------- Performance Requirements and Incentives -------------- ¶26. Performance requirements are generally limited to investment in the petroleum sector or in the newer area of private sector infrastructure development. These requirements tend to be specific to the concession or operating agreement (e.g., drilling a certain number of wells or producing a certain amount of electricity). More broadly, the preferential status (offshore, free trade zone) conferred upon some investments is linked to both percentage of foreign corporate ownership and limits on production for the domestic market. ¶27. The Tunisian Investment Code and subsequent amendments provide a broad range of incentives for foreign investors, including: Tax relief on reinvested revenues and profits; VAT limitation to 10 percent on many imported capital goods; Optional depreciation schedules for production equipment. ¶28. Further benefits are available for investments of a specific nature. For example, companies producing at least 80 percent for the export market receive: Full tax exemption on profits for the first ten years and 50 percent reduction in taxes on profits thereafter; Full tax exemption on reinvested profits and revenue; Duty-free import of capital goods with no local equivalents; Full tax and duty exemption on raw materials and semi-finished goods and services necessary for the business. ¶29. Large investments with high job creation potential may benefit, under certain conditions determined by the High Commission on Investment, from the use of state-owned land for a symbolic Tunisian dinar (less than one US dollar). Investors who purchase companies in financial difficulty may also benefit from certain clauses of the Investment Code; these advantages are determined on a case-by-case basis. ¶30. Additional incentives are available to promote investment in designated regional investment zones in economically depressed areas of the country, and throughout the country in the following sectors: health, education, training, transportation, environmental protection, waste treatment, and research and development in technological fields. ¶31. Foreign companies resident in Tunisia face a number of restrictions related to the employment and compensation of expatriate employees. Tunisian law limits the number of expatriate employees allowed per company to four. There are lengthy renewal procedures for annual work and residence permits. Although rarely enforced, legislation limits expatriate work permit validity to a total of two years. Central Bank regulations impose administrative TUNIS 00000141 002 OF 007 burdens on companies seeking to pay for temporary expatriate technical assistance from local revenue. For example, a foreign resident company that has brought in an accountant would have to document that the service was necessary, fairly valued, and unavailable in Tunisia before it could receive authorization to transfer payment from its operations in Tunisia. This regulation prevents a foreign resident company from paying for services performed abroad. ¶32. In November 2006, Tunisian President Zine El Abidine Ben Ali announced that the tax on corporate profits will be decreased from 35 percent to 30 percent. Additionally, the annual ceiling for foreign investments (without special authorization) will be raised from 300,000 TND (about US $234,000) to one million TND (about US $780,500). For exporting companies, the cap will be three million TND (about US $2.34 million). According to the recently announced measures, companies registered domestically will no longer need permission to increase their capital and non-residents will be allowed to freely manage their corporate accounts. These measures have yet to go into effect. -------------- Right to Private Ownership and Establishment -------------- ¶33. Tunisian government actions clearly demonstrate a strong preference for offshore, export-oriented FDI. Investors in that category are generally free to establish and own business enterprises and engage in most forms of remunerative activity. Investment which competes with Tunisian firms or on the Tunisian market or which is seen as leading to a net outflow of foreign exchange may be discouraged or blocked. ¶34. Acquisition and disposal of business enterprises can be complicated under Tunisian law and depend on the nature of the contract specific to the proposed transaction. ¶35. Disposal of a business investment leading to reductions in the labor force may be challenged or subjected to substantial employee compensation requirements. Acquisition of an on-shore company may require special authority from the Government if it is an industry subject to limits on foreign equity shareholding (such as in the services sector). -------------- Protection of Property Rights -------------- ¶36. Secured interests in property are both recognized and enforced in Tunisia. Mortgages and liens are in common use. Tunisia is a member of the World Intellectual Property Organization (WIPO) and has signed the United Nations (UNCTAD) Agreement on the Protection of Patents and Trademarks. The agency responsible for patents and trademarks is the National Institute for Standardization and Industrial Property (INNORPI). Foreign patents and trademarks should be registered with INNORPI. ¶37. Tunisia's patent and trademark laws are designed to protect only owners duly registered in Tunisia. In the area of patents, US businesses are guaranteed treatment equal to that afforded to Tunisian nationals. Tunisia recently updated their legislation to meet the requirements of the WTO agreement on Trade-Related aspects of Intellectual Property (TRIPS). Copyright protection is the responsibility of the Tunisian Copyright Protection Organization (OTPDA - Organisme Tunisien de Protection des Droits d'Auteur),which also represents foreign copyright organizations. New legislation now permits customs TUNIS 00000141 003 OF 007 officials to inspect and seize goods if copyright violation is suspected. ¶38. Tunisian copyright law (No. 36/1994) has been updated to cover new technologies, but its application and enforcement have not always been consistent with foreign commercial expectations. Print audio and video media are considered particularly susceptible to copyright infringement, and there is evidence of significant commercial sale of illegal products in these media. Illegal copying of software/CDs/DVDs is widespread. Over the past year, the Government of Tunisia has begun to demonstrate a more proactive stance on IPR matters and has increased its enforcement efforts in this area. For example, these efforts have led a major supermarket chain to halt the sale of pirated audio and video goods. -------------- Transparency of Regulatory System -------------- ¶39. The Tunisian government has adopted policies designed to promote foreign investment and to prepare Tunisian industry for free competition with foreign markets. Although the 1994 Investment Code substantially improved, standardized, and codified incentives for foreign investors, some aspects of existing tax and labor laws remain impediments to efficient business operations. ¶40. Bureaucratic procedures, while slowly improving in some areas, are cumbersome and time-consuming. Foreign employee work permits, commercial operating license renewals, infrastructure-related services, and customs clearance for imported goods are usually cited as the lengthiest and most opaque procedures in the local business environment. Investors have commented on inconsistencies in the application of regulations. These cumbersome procedures are not limited to foreign investment and also affect the domestic business sector. -------------- -------------- Efficient Capital Markets and Portfolio Investment -------------- -------------- ¶41. The mobilization and allocation of investment capital are still hampered by the underdeveloped nature of the local financial system. Interest in stocks and bonds is flat and the stock market has difficulty attracting capital investment. Capital controls are still in place. Foreign investors are permitted to purchase shares in resident firms (through authorized brokers) or to purchase indirect investments through established mutual funds. ¶42. The banking system is considered generally sound and is improving as the Central Bank has begun to enforce adherence to international norms for reserves and debt. Recent measures include actions to strengthen the reliability of financial statements, enhance bank credit risk management, and improve creditors? rights. Revisions to banking laws tightened the rules on investments and bank licensing, and increased the minimum capital requirement. The required minimum risk-weighted capital/asset ratio has been raised to 8 percent, consistent with the Basel Committee capital adequacy recommendations. Thirteen of the country?s fourteen banks conform to the ratio, compared with only two in 1993. Despite the strict new requirements, many banks still have substantial amounts of non-performing or delinquent debt in their portfolios. The Government has established debt recovery entities (societes de recouvrement de creances) to buy the non- or under- performing debt of commercial banks. There is no information available on the success of this measure. TUNIS 00000141 004 OF 007 ¶43. In spite of recent bank privatizations, government presence remains dominant in the banking sector. The government is the controlling shareholder in 11 of the 20 commercial and development banks. Out of 14 commercial banks, 9 are under private ownership, and 5 under government majority ownership, following the privatization of two banks in 2002 and 2005. The estimated total assets of the country's five largest banks are about US $10 billion. Foreign participation in their capital has risen significantly and is now well over 20 percent. ¶44. Consolidation activity is moving Tunisia closer to meeting its financial sector restructuring goals. Tunisia's leading commercial bank, STB (Societe Tunisienne de Banque),has merged with the Government of Tunisia?s economic and tourism development banks (BDET and BNDT) under the STB banner. The UIB (Union International de Banques) was privatized in late 2002, when 52 percent of its capital was sold to France?s Societe Generale for US $72 million. The 35 percent Government of Tunisia share of the Banque du Sud, now Attijari Bank, was sold to a Spanish/Moroccan consortium in late 2005. At the same time, the consortium purchased a block of privately-owned stock and therefore gained control of the bank with a 52 percent interest. ¶45. Credit is available locally to foreign investors, but some industry observers assert that there exists a well- established collusion among the principal banks to set common interest rates. ¶46. In the last five years regulatory and accounting systems have been brought more in line with required international standards. Most of the major global accounting firms are represented in Tunisia. Tunisian firms quoted on the stock exchange are required to publish semiannual corporate reports audited by a certified public accountant. ¶47. In mid-2005 the Tunisian Central Bank issued a new Euro-denominated bond on the London financial market. The issued totaled over US $496 million (400 million Euros) with a maturity of 15 years In 2004 the Government of Tunisia sold a similar bond with a total value of nearly US $550 million and seven-year maturity. -------------- Political Violence -------------- ¶48. Tunisia is a stable country and incidents involving politically-motivated damage to economic projects or infrastructure are extremely rare. In April 2002 21 people, 14 of them German tourists, were killed in an al- Qaeda-sponsored terrorist attack at a synagogue on the island of Djerba. This resulted in a significant reduction in the number of European visitors in the immediate aftermath of the attack, but the sector has now recovered. In December 2006 and January 2007 the Government of Tunisia announced that Tunisian security forces engaged a terrorist group, killing or capturing many individuals who reportedly planned to carry out acts of violence in Tunisia. The US Embassy in Tunis was reportedly among the group?s intended targets. -------------- Corruption -------------- ¶49. Tunisia's penal code devotes eleven articles to defining and classifying corruption and to assigning corresponding penalties (including fines and imprisonment). Several other legal texts also address broader concepts of TUNIS 00000141 005 OF 007 corruption including violations of the commercial or labor codes, which range from speculative financial practices to giving or accepting bribes. Detailed information on the application of these laws or their effectiveness in combating corruption is not available. There are no statistics specific to corruption. The Tunisian Ministry of Commerce publishes information on cases involving the infringement of the commercial code, but these incidents range from non-conforming labeling procedures to price/supply speculation. The print media report abuses of fiduciary authority by public officials only on rare occasions. Anecdotal reports from the Tunisian business community and US businesses with regional experience suggest that corruption exists, but is not as pervasive as that found in neighboring countries. After several years of steady improvement on Transparency International?s (TI) Corruption Index, Tunisia's ranking dropped from 43 to 51 in 2006 with a score of 4.6. According to the TI Corruption Index scale, a score of ten indicates extremely little corruption and a score of zero very serious corruption. ¶50. Tunisian law prohibits either giving or receiving a bribe. Penalties range from one to ten years imprisonment and fines up to twice the amount of the bribe. (Members of the judiciary convicted of involvement in bribery can be imprisoned for 20 years.) The prohibition extends to bribes to foreign officials. Public tenders require bidders to provide a sworn statement that they have not and will not, either themselves or through a third party, make any promises or give gifts with a view to influencing the outcome of the tender and realization of the project. ¶51. Most US firms involved in the Tunisian market have not identified corruption as a primary obstacle to foreign direct investment. Some potential investors have asserted that unfair practices and corruption among prospective local partners have delayed or blocked specific investment proposals, or there has been an appearance that cronyism or influence peddling has affected some investment decisions. ¶52. The government's recent efforts to combat corruption have concentrated upon ensuring that price controls are respected, enhancing commercial competition in the domestic market, and harmonizing Tunisian laws with their counterparts in the European Union. The public sector is governed by a comprehensive 1989 law designed to regulate each phase of public procurement and established the Commission Superieure des Marches? (CSM - Higher Market Commission) to supervise the tender and award of major contracts. The government publicly supports a policy of transparency and has called for it in the conduct of privatization operations. The US government requires that American companies requesting US government advocacy support with foreign governments sign an undertaking not to participate in corrupt practices. ¶53. The Ministry of Commerce's "Competitiveness Council" and its related regional branches (Brigades Economiques) have primary responsibility for identifying and reducing corruption. A variety of other bodies exist within each institution of the government to oversee the execution of public sector contracts. The value of the contract determines the level and identity of the responsible oversight committee, with the largest projects falling under the purview of the Higher Market Commission (CSM). This body reports directly to the Prime Minister. -------------- Bilateral Investment Agreements -------------- ¶54. A Trade and Investment Framework Agreement (TIFA) TUNIS 00000141 006 OF 007 between Tunisia and the United States was signed in 2002 and two TIFA Council meetings have taken place. A Bilateral Investment Treaty between Tunisia and the United States took effect in 1991. A 1985 treaty (and 1989 protocol) guarantees US firms freedom from double taxation. ¶55. Tunisia has concluded bilateral trade agreements with approximately 60 countries. Tunisia has signed the Agreement on WTO, bilateral agreements with the Member States of the European Free Trade Association (EFTA), bilateral and multilateral agreements with the Arab League members, and a bilateral agreement with Turkey. In 2008, Tunisia?s Association Agreement with the EU will go into effect creating a free trade zone between Tunisia and the EU member states. In addition, Tunisia is signatory of the multilateral agreements with the Multilateral Investment Guarantee Agency (MIGA). -------------- OPIC and Other Investment Insurance Programs -------------- ¶56. OPIC is active in the Tunisian market and provides political risk insurance and other services to a variety of US companies. OPIC supports private US investment in Tunisia and has sponsored several reciprocal investment missions. The 1963 OPIC agreement with Tunisia has been revised and was signed in February 2004. -------------- Labor -------------- ¶57. Tunisian labor is readily available. Tunisia has a labor force of approximately 3.5 million and a national literacy rate of about 75 percent. About 90 percent of the work force under 35 is literate. The official unemployment rate is under 14 percent (although this is considerably higher in some regions). The figure does not include many who are underemployed. ¶58. Nearly 80,000 new jobs must be created each year to keep unemployment at current levels, while sustained annual GDP growth of about 7 percent would be required in order to make significant inroads into the chronic unemployment figure. The structure of the workforce has remained stable over the past 20 years (19 percent agriculture, 32 percent industry, and 49 percent commerce and services). ¶59. The right to form a labor union is protected by law. There is only one national labor confederation, the General Union of Tunisian Workers (UGTT - Union General des Travailleurs Tunisiens). The UGTT claims about one third of the labor force as members, although more are covered by UGTT-negotiated contracts. Wages and working conditions are established through triennial collective bargaining agreements between the UGTT, the national employers association (UTICA - Union Tunisienne de l?Industrie, du Commerce et de l'Artisanat),and the Government of Tunisia. These agreements set industry standards and generally apply to about 80 percent of the private sector labor force, whether or not individual companies are unionized. The most recent wage agreements were completed in 2006 and are valid through 2008. The official minimum monthly wage in the industrial sector is 200 TND (about US $156) for a 40 hour week and 231 TND (about US $180) for a 48 hour week. -------------- Foreign Trade Zones/Free Trade Zones -------------- ¶60. Tunisia has two free trade zones, one in the north at Bizerte, and the other in the south at Zarzis. The land is TUNIS 00000141 007 OF 007 state owned, but the zones are each managed by a private company. Companies established in the free trade zones, officially known as ?Parcs d?Activites Economiques,? are exempt from most taxes and customs duties and benefit from special tax rates. ¶61. Offshore enterprises operating outside these zones benefit from similar advantages. Goods are allowed limited duty-free entry into Tunisia for transformation and re- export. Factories are considered bonded warehouses and have their own assigned customs personnel. ¶62. However, companies do not necessarily have to be located in one of the two designated free-trade zones to operate with this type of business structure. In fact, the majority of off-shore enterprises are situated in various parts of the country. Regulations are strict, and operators must comply with the 1993 Investment Code. -------------- Foreign Direct Investment Statistics -------------- ¶63. Total FDI in Tunisia is estimated at about US $19 billion. It has contributed to the creation of over 2,765 companies and approximately 268,000 jobs. Foreign investment in manufacturing industries producing for export has long been the major generator of jobs in Tunisia and has attracted the bulk of FDI. In 2006 FDI totaled about US $921 million or US $3.07 billion including the receipts from the partial privatization of state-owned Tunisie Telecom. GODEC