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Viewing cable 08BUENOSAIRES58, Argentina: 2008 Investment Climate Statement

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Reference ID Created Released Classification Origin
08BUENOSAIRES58 2008-01-16 11:35 2011-08-25 00:00 UNCLASSIFIED Embassy Buenos Aires
VZCZCXYZ0000
RR RUEHWEB

DE RUEHBU #0058/01 0161135
ZNR UUUUU ZZH
R 161135Z JAN 08
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 0052
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 
------------------------------ 
 
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. 
 
------------------ 
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