Commerce DAS Dyck meets Croatian Ministers of Economy and

UNCLAS ZAGREB 000285 SIPDIS SIPDIS E.O. 12958: N/A TAGS: ECON ETRD EINV HR SUBJECT: Commerce DAS Dyck meets Croatian Ministers of Economy and Finance ¶1. SUMMARY: Deputy Assistant Secretary of Commerce Paul Dyck discussed possible investment opportunities in Croatia with Croatia's Minister of Economy and Minister of Finance. Dyck also commended Croatia for its economic progress, notably in working to resolve IPR issues. He also raised concerns expressed by US firms in Croatia regarding unresolved taxation issues and urged the GoC to take action. END SUMMARY. ¶2. During a meeting with Minister of Economy Branko Vukelic, DAS Dyck expressed appreciation for the GoC's increasingly active commercial relationship with the U.S. and said he was impressed by initiatives to reinvigorate the economy, including the Investment Promotion Agency, Hitro, the one-stop shop for information on administrative procedures in establishing a business in Croatia, and two recent programs: Hitro Res and the Export Offensive. DAS Dyck mentioned the Department of Commerce's opening of the Invest in the USA office. Dyck said U.S. firms are interested in investing in energy, infrastructure and biotechnology projects in Croatia. He noted, however, that U.S. firms are concerned about lack of transparency and the high cost of the labor force in Croatia. ¶3. Vukelic said energy was an important sector for U.S. investment and offered opportunities such as an LNG project and the Pan European Oil Pipeline (PEOP) project. He said entrepreneurship and industrial zones established throughout the country welcome foreign investors. He added Croatia's infrastructure is already in place with many established highways and rail lines. Vukelic also explained Croatia's workforce is not cheap labor because it is a knowledge-based society, but added that labor is less expensive than in western Europe. He thanked USAID for helping to develop the small and medium business sector and said the continuation of GSP will help the economy develop further. He said Croatia has created an agency for the protection of market competition, intended to ensure that all rules are applied fairly and obeyed in the commercial market. He added that he would like to see Croatia not only known as one of the best tourist destinations, but also one of the best business destinations. ¶4. Minister of Finance Ivan Suker told DAS Dyck that Croatia has three objectives: macroeconomic stability, successful negotiations with the EU and the creation of an entrepreneurial environment to encourage domestic and foreign investment. He said he hopes to see more companies, like Barr Pharmaceuticals, come to Croatia. DAS Dyck commended Croatia for the handling of the Barr-Pliva sale, but said, after meeting with several US firms over the two day visit, that foreign companies still face challenges, especially in resolving taxation issues. Specifically, DAS Dyck discussed concerns of Xagent, an authorized Xerox agent, and Phoenix Trade, which distributes Sara Lee products. Xagent reported that the GoC is charging corporate tax on all of the revenues based on warranty-type maintenance and supplies contracts for sold or leased equipment. Phoenix Trade is being taxed on promotional activities; however, according to Croatian law, companies are exempt from such payments when the receiver of the promotional activities has its headquarters abroad. Phoenix is appealing the Ministry of Finance ruling that the company must pay taxes plus accumulated interest for promotional activities. Ambassador Bradtke will submit specific information about each firm directly to the Minister since the issues could not be resolved during the meeting. DAS Dyck also said companies were concerned about lack of transparency in the public procurement process, which makes it difficult for some companies to participate. ¶5. Minister Suker said it is important for Croatia to be extra vigilant on taxation matters regarding multinational companies to guard against possible money laundering. He also said both of those companies have resident status and therefore must abide by Croatia's tax laws. He said Croatia is aligning its legislation with EU legislation so there should be no question of transparency or of taxation in Croatia. After the discussion, he said his ministry would review both cases. Commenting on the procurement process, Suker said Croatia changed the law two years ago, which should make the process more transparent. He said the most difficult change will be in the mindset of the people involved in the process. He said the law should be fully implemented by the end of this year. ¶6. Suker also questioned the delay in negotiating a Bilateral Tax Treaty between the U.S. and Croatia. DAS Dyck said he would work with AMCHAM and U.S. firms to provide a status report to the U.S. Treasury to advance Croatia in the queue. He said investments, such as Barr, will help make Croatia a higher priority. BRADTKE