Identifier
Created
Classification
Origin
08BUENOSAIRES58
2008-01-16 11:35:00
UNCLASSIFIED
Embassy Buenos Aires
Cable title:  

Argentina: 2008 Investment Climate Statement

Tags:  ECON EINV ETRD OPIC KTDB USTR PGOV AR 
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INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHINGTON DC
RUCPCIM/CIM NTDB WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUEHAC/AMEMBASSY ASUNCION 6758
RUEHMN/AMEMBASSY MONTEVIDEO 6958
RUEHSG/AMEMBASSY SANTIAGO 0980
RUEHBR/AMEMBASSY BRASILIA 6641
RUEHLP/AMEMBASSY LA PAZ JAN CARACAS 1660
RUEHMD/AMEMBASSY MADRID 1962
RUEHFR/AMEMBASSY PARIS 1348
UNCLAS BUENOS AIRES 000058 

SIPDIS

SIPDIS

DEPARTMENT FOR EB/IFD/OIA
PASS NSC FOR MICHAEL SMART
PASS FED BOARD OF GOVERNORS FOR ROBITAILLE
PASS USTR FOR DUCKWORTH AND SULLIVAN
TREASURY FOR MATTHEW MALLOY
USDOC FOR 4322/ITA/MAC/OLAC/PEACHER
US SOUTHCOM FOR POLAD

E.O. 12958: N/A
TAGS: ECON EINV ETRD OPIC KTDB USTR PGOV AR
SUBJECT: Argentina: 2008 Investment Climate Statement

Ref: 07 State 158802

------------------------------
Openness to Foreign Investment
------------------------------

UNCLAS BUENOS AIRES 000058

SIPDIS

SIPDIS

DEPARTMENT FOR EB/IFD/OIA
PASS NSC FOR MICHAEL SMART
PASS FED BOARD OF GOVERNORS FOR ROBITAILLE
PASS USTR FOR DUCKWORTH AND SULLIVAN
TREASURY FOR MATTHEW MALLOY
USDOC FOR 4322/ITA/MAC/OLAC/PEACHER
US SOUTHCOM FOR POLAD

E.O. 12958: N/A
TAGS: ECON EINV ETRD OPIC KTDB USTR PGOV AR
SUBJECT: Argentina: 2008 Investment Climate Statement

Ref: 07 State 158802

--------------
Openness to Foreign Investment
--------------


1. Argentina remains open to foreign investment. Five
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 the
rigidity that it imposed on exchange rate policy, 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
four-year recession that culminated in a financial panic in

November 2001.

In January 2002, the government ended convertibility and
defaulted on roughly $82 billion in privately held debt and
over $6 billion in debt to official government creditors
(including approximately $360 million owed to the U.S.
government). In February 2005, private investors holding
76 percent of Argentina's defaulted debt accepted an
Argentine government offer of approximately 30 cents on the
dollar of old debt. Some remaining "holdout" private
bondholders are still actively seeking redress but, as of
this writing, the GOA has declined to deal with private
bondholders who chose not to participate in the 2005
restructuring. Of the over $6 billion owed to official
government creditors, over $4 billion consists of arrears
and past-due interest. The GOA has indicated interest in
normalizing its relationship with official government
creditors.

Argentina posted real GDP growth of 8.8 percent in 2003,
9.0 percent in 2004, 9.2 percent in 2005, 8.4 percent in
2006, and an estimated 8.5 percent in 2007. This
impressive economic recovery, which has also led to
improvements in key socio-economic indicators, can be
attributed to a number of factors. These include
Argentina's post-crisis move to a flexible exchange rate
regime, sustained global and regional growth, a boost in
domestic aggregate demand via monetary, fiscal and income
distribution policies, favorable international commodity
prices, and interest rate trends.

New taxes, better collecting efforts, and the recovery's
strong impact on revenues have allowed the government to
record primary fiscal surpluses in recent years. The 2006
federal primary surplus amounted to 3.5 percent of GDP, and
is estimated at 3.3 - 3.48 percent of GDP in 2007, although
this declined to roughly 2.3 - 2.5 percent of GDP when
excluding a one-time adjustment due to changes in
Argentina's pension regime). The government projects a
primary fiscal surplus of about 3.5 percent in 2008.

Argentina should continue to perform well, with the Central
Bank of Argentina's consensus survey forecasting 6.6
percent real GDP growth for 2008. A range of economic
experts have identified challenges to sustaining high
levels of economic growth in the future, including:
capacity constraints; the need for substantial new
investment in primary infrastructure; potential energy
shortages in the face of high growth and domestic energy
prices maintained by the government below international
market levels; increasing scarcity of highly skilled labor;
inflation (8.5 percent in 2007 according to official
statistics, but estimated by independent analysts to be
significantly higher) and the government's heterodox
policies to contain it, including pressure on the private
sector to limit price increases via "price stabilization"
agreements; and delays addressing the post-crisis
renegotiation of public service contracts.

The industrial sector has performed well, growing from 16
percent of GDP in 2001 to 22.3 percent in 2006.
Illustrative of this industrial expansion, the domestic car
industry had its best year in history in 2007, with
production reaching 544,647 units, up 26% from 2006.
Automotive exports reached 316,410 units in 2007, also an
all-time record, and comprising about 58% of total
production. In 2007, the automotive industry accounted for
almost 20% of Argentina's manufacturing output and 36% of
all manufacturing exports, measured by value.

Argentina's economic expansion continues to create jobs,
and unemployment continues to decline, down from a 21.5
percent peak in 2002 to 8.8 percent during the third
quarter of 2007 according to official government
statistics. Investment in real terms, according to
consensus forecasts published by the Central Bank, was
estimated to have increased 13.8 percent in 2007.
Meanwhile, the move from convertibility to a managed float
exchange rate regime and high global commodity prices have
lifted the value of exports to record levels. A
substantial foreign exchange reserve cushion ($46 billion
as of December 2007) has also helped insulate the economy
from external shocks. In January 2006, the GOA used
reserves to pay down its $9.5 billion debt to the IMF.

Argentina's Central Bank has managed monetary and currency
policy in support of the economic expansion, maintaining an
undervalued or "competitive" exchange rate and negative
real interest rates. Such policies have contributed to
substantial inflationary pressures. To help control
inflation, the government largely froze key public utility
tariff rates since 2002 and, since 2005, has negotiated
price stabilization agreements on a sizeable basket of
essential consumer goods.

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. According to private rating agencies,
most private banks (which hold approximately 55 percent of
total financial system deposits and 67percent of loans)
have returned to solvency. The ratio of private bank non-
performing loans has fallen to an historic low of
approximately 2.5 percent, and profits for the overall
banking system are among the highest levels achieved in
over a decade. According to central bank regulatory
authorities, public banks, which hold the remaining assets,
are also solvent and liquid. However, system-wide, 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 financial markets or support large-scale
project finance. Government officials have acknowledged
the lack of medium- and long-term credit facilities needed
to support the expansion of domestic productive capacity
and, according to media reports, are considering whether
and how to structure a state-supported long-term financing
vehicle.

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" (or a
bankruptcy court's enforcement of a reorganization plan
despite the objections of some creditors) 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
Customs Area (SCA) in Tierra del Fuego, among other
benefits. A complete description of the scope and scale of
Argentina's investment promotion programs and regimes can
be found at http://www.industria.gov.ar and
http://www.prosperar.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 2007 ranked 109 out of 178 nations and
territories surveyed in overall "ease of doing business,"
down from 101 in 2006. 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
--------------


2. 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
policy changes has generated considerable uncertainty for
investors.

The Argentine 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 percent in 2002,
following the financial crisis that began in December 2001.
The peso subsequently appreciated 15 percent against the
USD in nominal terms in 2003, and slightly depreciated by
two percent in 2004, two percent in 2005, one percent in
2006, and three percent in 2007.

Argentina imposed limited capital controls in July 2003
through Decree 285/2003, which establishes a regime 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 U.S. dollars 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 diverged 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
--------------


3. 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 (see Dispute Settlement Section).

--------------
Dispute Settlement
--------------


4. 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 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
Treasury Attorney, 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 Treasury
Attorney. It receives investor complaints, gathers
information and carries out negotiations with foreign
investors.

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, adjusting for
inflation and adding a four percent annual interest rate to
be applied retroactively since the pesification began.

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, and there have
been allegations of corruption in the administration of
bankruptcies and the selection of bankruptcy trustees.
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.

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 2007, 32 percent of total pending ICSID
cases, with total claims of over USD 13 billion. Fourteen
of these pending ICSID cases have been filed under the U.S.
BIT. Over the past three years, several ICSID claimants
who represent a substantial share of total claims against
Argentina have suspended their ICSID proceedings to
facilitate further negotiation with the government. A
number of the pending cases are reaching their final
conclusion and, in one case, a final judgment of over $100
million against Argentina has been upheld. Government
payment to the U.S. claimant under this ICSID final award
remains pending.

--------------
Performance Requirements/Incentives
--------------


5. 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).

--------------
Right to Private Ownership and Establishment
--------------


6. 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. 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.

--------------
Protection of Property Rights
--------------


7. 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 and implemented
a special procedure for both parties to reach an agreement
for repaying the mortgage. This special procedure is only
applied when delinquency in payment occurred from January
2001 to September 2003.

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. Argentina has
been on the Office of the U.S. Trade Representative's
intellectual property rights "Priority Watch List" since

1996.

Patents: Patent protection 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 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. New patent
legislation implementing part of the April 2002 agreement
was passed in December 2003. However, some U.S. and
European pharmaceutical firms are concerned that provisions
in the legislation, in practice, 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
estimated at over 60 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 -
has not been implemented. The government has also improved
the process for trademark registration, decreasing the time
needed and increasing the rate at which trademarks are
registered. However, the trademark law, passed in 1980,
provides what are widely considered to be non-deterrent
civil damages, and in criminal cases the judiciary is
reluctant to impose deterrent penalties such as prison
sentences. Argentina has no specific law on trade secrets,
although penalties for unauthorized revelation of secrets
are applied to a limited degree under commercial 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 System
--------------


8. 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 generally acted 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 arlier 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 it was worried about its
access to foreign exchange and the devaluation of the peso.
When the peso began to appreciate in late 2002/early 2003,
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. According to the Central
Bank, as of December 2007, one judgment in these cases has
been rendered in favor of the involved company. Remaining
cases are still pending.

The GOA's actions since 2003 have not calmed investor
concerns about the regulatory environment. The GOA issued
a decree depesifying 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
aforementioned 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 response to significant energy shortages during
Argentina's July/August 2007 winter season, the GOA
mandated several weeks of cutbacks in electricity and gas
consumption by major wholesale consumers. This action
caused a slight decrease in industrial production, rolling
blackouts in major urban areas, and cutbacks in the
availability of compressed natural gas used by many
automobiles and most taxis. In December 2007, President
Cristina Fernandez de Kirchner announced a National Energy
Saving Plan with measures that include seasonal time
changes, regulation of energy use in public buildings and
incentives for consumers to adopt more energy-efficient
home appliances.

In November 2007, the GOA moved to end export tax
exemptions for several mining companies, and imposed a
federal levy on mineral exports, ranging from five percent
to ten percent. A number of industry participants have
characterized the action as a significant departure from
Argentina's 1993-era mining law, which guaranteed tax
stability for 30 years, and several are seeking redress
through the courts. The new system is sill being
implemented as of the drafting of this report.

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 four major taxes: value-
added tax (VAT),income tax, export taxes, and a financial
transactions tax. The income tax is assessed on income
earned by companies, at a rate of 35 percent, and on
individuals at a rate ranging from 9 percent to 35 percent.
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 within five years.
Export taxes are tariffs imposed on the export of goods,
with rates from five percent to 45 percent. The financial
transactions tax imposes a 1.2 percent on checking and
savings account transaction 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 are
entitled to receive VAT rebates, but many companies report
that have experienced extensive delays in their receipt of
the 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 fees.
Many investors allege that the supply 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
--------------


9. 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. 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. The
private pension fund system -- consolidated in 1995 --
provided a growing base for capital markets until the 2001-
2002 economic and financial crises. Following the
government's 2005 debt restructuring, private pension funds
have again become significant players in domestic capital
markets.

In October 2007, the government introduced new regulations
requiring the private pension funds (the AFJPs) to
gradually reduce their investments in Mercosur countries
(the majority of which are in Brazilian financial assets)
in a move apparently designed to increase the liquidity and
depth of domestic capital markets. According to previous
rules governing investments, AFJPs could invest ten percent
of their portfolios in foreign assets. However,
investments in Mercosur countries were excluded from this
ten percent limit, meaning that AFJPs could account for
them as domestic assets. To preclude sudden large foreign
exchange inflows, the government resolution calls for the
gradual reduction of Mercosur investments, beginning with a
cap of eight percent of total assets in December 2007,
falling to six percent in April 2008, four percent in
August 2008, and ending at two percent in December 2008.
By December 2008, returned funds should total about 8
billion pesos (roughly $2.5 billion),according to local
analysts.

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Political Violence
--------------


10. Since the 2001/2 economic crisis, protests, marches,
and roadblocks directed at the national, provincial and
municipal governments, as well as some multinational
companies, have been 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. 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. Since these 2005
incidents, no other such events have occurred.

In protest against the construction, and the October 2007
completion, of a $1.2 billion pulp mill on the Uruguayan
side of a river that defines the Argentine/Uruguay border,
Argentine citizens have since December 2006 completely
blocked one of three bridges that connects the two nations,
and periodically blocked the other two bridges that connect
them. 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 bloc's
arbitral tribunal considered the case in 2006 and found the
blockade illegal and a violation of the right of free
transit of goods and services in the region, but imposed no
sanctions (and lacks enforcement authority). The
Governments of Argentina and Uruguay have asked the
International Court of Justice for an opinion on whether
construction of the plant violated a 1975 Argentine-
Uruguayan treaty dealing with its shared river, and a
decision is expected in 2008.

--------------
Corruption
--------------


11. 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.
Some foreign firms also complain that their adherence to
the letter of the tax and regulatory codes places them at a
competitive disadvantage.

Transparency International (TI) has a local chapter in
Argentina. In the latest TI Corruption Perceptions Index
(CPI) that ranks countries and territories by their
perceived levels of corruption, Argentina ranked 105 out of
180 countries and territories, 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. 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 200 billion pesos in 2007, up from
around 163 billion in 2006 and 150 billion in 2005.

In 2007, a major corruption investigation involving alleged
bribe payments by employees of a foreign multinational
corporation to government authorities has been widely
reported in the press. The ensuing investigation has
reportedly significantly delayed a planned expansion of
Argentina's natural gas pipeline network. Also in 2007, a
federal congressman denounced an attempt by a foreign
multinational to pay a bribe in exchange for supporting
legislation favorable to the company's future business.
Media reports that the Foreign Ministry plans to take this
case to the OECD Anti-Corruption Committee.

Argentina is a party to the OAS Anti-Corruption Convention
and ratified the OECD Anti-Corruption Convention in 2001.
Argentina has signed and ratified the UN Convention Against
Corruption (UNCAC). It is an active participant in UNCAC's
Conference of State Parties and is participating in the
pilot review of the implementation of UNCAC. It is also an
active participant in the Mechanism for Follow-up on the
Implementation of the Inter-American Convention Against
Corruption (MESICIC). 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 (ACO) also carries out investigations
into cases of alleged corruption involving Executive branch
officials or in matters involving federal funds, except for
funds transferred to the provinces. Although nominally a
part of the judicial branch, the ACO does not have
authority to independently prosecute cases, but can refer
cases to other agencies or serve as the plaintiff and
request a judge to initiate a case. The majority of high-
profile corruption cases, however, are investigated by
individual judges. These judges, however, may request
assistance from the ACO in gathering or analyzing evidence,
especially when related to complicated financial
transactions.

A recent ACO investigation of GOA public purchases between
2002 and 2005 revealed that about 75 percent were
accomplished via direct contracts, often with a sole
provider, and not via public tenders. The ACO report
expressed concern that this process can facilitate
corruption and does not allow competition among providers.
The ACO report noted that some GOA officials defended this
practice, claiming that many contracts were below the
legally-mandated limit of 10,000 pesos (about USD 3200),
under which tenders are not required. GOA officials also
claimed that sometimes only one provider was able to meet
contract specifications. In response, the ACO report noted
that GOA officials often avoided the 10 thousand peso limit
by disaggregating contract components so that no part
exceeded this limit, that contract specifications were
sometimes written so that only one provider could meet the
requirement, or failed to widely advertise tenders so that
other providers could be made aware of them.

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
--------------


12. 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. The Argentina-United States BIT can
be found on the following site:
http://www.state.gov/documents/organization/4 3475.pdf.htm.
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, a
number of treaties concerning the exemption of income from
international transport are in force.

--------------
OPIC and other investment insurance programs
--------------


13. 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
--------------


14. Argentine workers are among the most 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 2007, the official unemployment
rate was 8.1 percent, down from a 21.5 percent peak in
2002, but this number excludes recipients of government
assistance to unemployed heads of households. If those
recipients were included, unemployment would be
approximately 8.8 percent. According to the Ministry of
Labor, about 44 percent of workers 14 years and older work
in the informal sector.

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.

Argentine law provides unions with the right to negotiate
collective bargaining agreements and to have recourse to
conciliation and arbitration. The Ministry of Labor,
Employment, and Social Security ratifies collective
bargaining agreements, which covered roughly 75 percent of
the formally employed work force. According to the ILO,
the ratification process impeded free collective bargaining
because the ministry considered not only whether a
collective labor agreement contained clauses violating
public order standards but also whether the agreement
complied with productivity, investment, technology, and
vocational training criteria. However, there were no known
cases during the year of government refusal to approve any
collective agreements under these criteria. There are no
special laws or exemptions from regular labor laws in the
foreign trade zones.

With the unemployment rate now below nine percent, numerous
employers continue to comment 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.,
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. In
an effort to avoid massive layoffs during the 2002
financial crisis, severance payments were doubled. This
"double indemnification" labor termination policy was ended
in September 2007 when official unemployment dropped below
ten percent. According to the World Bank's "Doing
Business" survey compiled before this double
indemnification policy was ended, the cost of terminating
an employee in Argentina averaged 139 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
--------------


15. 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
specific production and employment objectives.

The SCA program applies only to Tierra del Fuego Province.
The government reduced some SCA benefits in the early
1990s. Some 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
--------------


16. According to the United Nations Conference on Trade and
Development (UNCTAD) World Investment Report 2007, the
total stock of FDI in Argentina at the end of 2006 was
estimated at $58.6 billion. Spain, the United States, and
France remain the top three investors. Other important
sources of investment capitalinclude Brazil, Canada,
Mexico, U.K., Italy, Chile, the Netherlands and Germany.

Also according to UNCTAD, Argentina received 1.3 percent of
foreign direct investment (FDI) inflows to developing
countries, and 5.7 percent of FDI inflows to Latin America
and the Caribbean in 2006. Both of these shares are well
below Argentina's average FDI share from the pre-crisis
1992-2000 period. Total FDI inflows in 2006 were estimated
at $4.8 billion. The stock of U.S. FDI in Argentina in
2006 was estimated at $13 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.

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. In 2006, according to UNCTAD,
its outward FDI amounted to $2.0 billion.

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.

KELLY