VZCZCXYZ0029
RR RUEHWEB

DE RUEHBU #0033/01 0061417
ZNR UUUUU ZZH
R 061417Z JAN 06
FM AMEMBASSY BUENOS AIRES
TO RUEHAC/AMEMBASSY ASUNCION 5238
RUEHBR/AMEMBASSY BRASILIA 5002
RUEHLP/AMEMBASSY LA PAZ JAN MONTEVIDEO 5189
RUEHSG/AMEMBASSY SANTIAGO 4824
RUEHRI/AMCONSUL RIO DE JANEIRO 1804
RUEHSO/AMCONSUL SAO PAULO 2690
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RHEHAAA/WHITE HOUSE WASHINGTON DC

UNCLAS SECTION 01 OF 08 BUENOS AIRES 000033 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EB/IFD/OIA, WHA/BSC, AND WHA/EPSC 
DEPT PASS USTR 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ETRD ELAB KTDB PGOV OPIC USTR
SUBJECT: ARGENTINA -- 2006 INVESTMENT CLIMATE STATEMENT 
(PART 1 OF 2) 
 
REF: 05 STATE 202943 
 
The following is Part I of the 2006 Investment Climate 
Statement for Argentina.  Begin Text: 
 
----------------------------------- 
A.1. Openness to Foreign Investment 
----------------------------------- 
 
Argentina is open to foreign investment.  Argentina ended its 
1-to-1 conversion rate with the U.S. dollar in January 2002 
and pesified bank accounts and contracts.  The move to a 
market-based exchange rate regime has altered the investment 
situation substantially from that of the 1990s, when the 
country's flexible investment regime and fixed 1-to-1 
conversion rate with the US dollar (USD) spurred significant 
foreign investment.  Many sectors that were uncompetitive 
under peso-dollar parity (convertibility) now offer 
investment opportunities, even while the pesification of 
dollar-denominated contracts undermined the financial base 
for many existing foreign investments.  The Kirchner 
Administration encourages new foreign investment and has 
expressed a preference for U.S. companies.  Legal 
uncertainties continue concerning creditor, contract and 
property rights, and frequent and unpredictable regulatory 
changes have diminished the attractiveness of some sectors 
for foreign investors. 
 
Then-president Menem imposed convertibility in 1992 to break 
the back of hyperinflation and adopted far-reaching 
market-based policies.  Menem's accomplishments included 
dismantling a web of protectionist trade and business 
regulations, and reversing a half century of statism by 
implementing an ambitious privatization program.  These 
reforms contributed to significant increases in investment 
and growth with stable prices through most of the 1990s. 
Unfortunately, widespread corruption in the Menem and 
successor De la Rua administrations shook confidence and 
weakened the recovery.  Also, while convertibility defeated 
inflation, its permanence 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 country was also hurt by the contagion effect of the 
Asian financial crisis of 1998.  Argentina went into 
recession in late 1998, which deepened into depression that 
culminated in a financial panic in late.  In December 2001, 
amidst bloody riots, President De la Rua resigned, and 
Argentina defaulted on USD 88 billion in debt, the largest 
sovereign debt default in history.  In February 2005, 
investors holding 76 percent of Argentina's defaulted 
principal accepted a government offer of approximately 30 
cents per dollar face value of old debt in what became the 
largest sovereign restructuring in history.  As of this 
writing, the government of Argentina has not presented a plan 
for dealing with bondholders who chose not to participate in 
the restructuring. 
 
An export-led boom has spurred a surge in real GDP growth 
over the past three years.  Argentina's economy grew 8.7 
percent in 2003, 9.0 percent in 2004, and is projected to 
grow 8.3 percent in 2005.  Industrial activity and 
construction have performed well, growing 7.7 percent and 
13.9 percent, respectively, during the first eleven months of 
¶2005.  Domestic car sales and exports increased 33.9 percent 
and 26.7 percent, respectively, in the first eleven months of 
¶2005.  Tourism has soared, with Argentina receiving an 
estimated 3.7 million foreign tourists in 2005, a record. 
 
The expansion is creating jobs, and unemployment dipped from 
16.3 percent in the third quarter of 2003 to 11.1 percent 
during the third quarter of 2005.  Investment in real terms 
is forecast by the Central Bank to have jumped 18.3 percent 
in 2005, and capital flight reversed.  The recovery,s strong 
impact on revenue levels and the Kirchner Administration,s 
sound fiscal policy achieved exceptional results, with the 
federal fiscal surplus reaching approximately 3.7 percent of 
GDP in 2005 (although federal public spending grew a nominal 
23.4 percent annually in the first three quarters of 2005). 
 
BUENOS AIR 00000033  002 OF 008 
 
 
Provincial fiscal figures for 2005 are very preliminary at 
this writing, so it is difficult to include consolidated 
fiscal figures for both the national and provincial 
governments.  The consolidated primary surplus was 5.1 
percent of GDP in 2004.  However, the tax burden is now 
nearly 27 percent of GDP, up from 21 percent in 2000. 
 
Meanwhile, the move to a market-based exchange rate regime 
and high global commodity prices have lifted exports to 
record levels and, together with a sharp decrease in imports 
in 2002, assured hefty surpluses in Argentina,s trade and 
current accounts of the balance of payments.  The favorable 
balance of payments performance and Argentina,s non-payment 
of its private debt obligations allowed a strong accumulation 
of foreign exchange reserves, which reached nearly USD 28.1 
billion at the end of 2005, representing 11.8 months of 
current imports.  However, the GOA in early 2006 used 
reserves to cancel all of Argentina's debt with the IMF, so 
reserves dropped by approximately USD 9.5 billion in one 
transaction.  Argentina's remaining reserves represent 
approximately 7.7 months of current imports.  The demand for 
pesos increased over 125 percent between November 2002 and 
November 2005 due to the recovery of economic activity and 
the appreciation of the peso. 
 
Argentina,s Central Bank has ably managed monetary policy in 
support of the economic expansion, achieving low interest 
rates and relatively stable prices, although inflation is a 
growing concern.  Banks are now in the black on an operating 
basis and net credit levels to the private sector are 
positive.  However, most bank deposit growth derives from 
short-term, public sector deposits, and therefore cannot 
serve as the basis for a long-term credit policy for private 
sector financing.  Banks also report that demand for 
commercial credit remains low.  As a consequence, credit 
growth to the private sector has lagged growth in the economy. 
 
Argentina,s impressive recovery is a function of a number of 
factors.  First, following a decade of market reforms, the 
economy was fundamentally sound except for the high level of 
indebtedness.  Second, the adoption of a market exchange rate 
and favorable international commodity and interest rate 
trends were catalytic factors in the export-led boom. 
Argentina's successful debt exchange and prepayment of its 
IMF debt will likely strengthen the country going forward, 
and Argentina should continue to perform well in 2006, with 
growth projected to be in the 5-7 percent range. 
 
Decree 1853/1993 governs foreign investment in Argentina. 
According to this decree, foreign companies may invest in 
Argentina without registration or prior government approval, 
and on the same terms as investors domiciled in Argentina. 
Investors are free to enter Argentina through merger, 
acquisition, greenfield investment, or joint venture. 
Foreign firms may also participate in publicly financed 
research and development programs on a national treatment 
basis.  In June 2003, Argentina enacted legislation limiting 
foreign ownership of "cultural goods," which includes media 
and Internet companies, to 30 percent.  An exception to the 
30 percent limit is made for investors from those countries 
whose foreign investment regimes allow more than 30 percent 
foreign ownership of cultural goods.  This law also exempts 
media companies from "cramdown" rules in restructuring and 
bankruptcy. 
 
A Bilateral Investment Treaty (BIT) between Argentina and the 
United States entered into force in October 1994.  The BIT 
provides protections against capital movement restrictions, 
expropriations, and performance requirements; it also 
establishes effective means for the settlement of investment 
disputes.  The BIT lists a few sectors in which Argentina 
maintains exceptions to national treatment for U.S. 
investors: real estate in border areas, air transportation, 
shipbuilding, nuclear energy, uranium mining, and fishing. 
U.S. investors must obtain permission from the Ministry of 
Defense's Superintendency for Frontiers to invest in 
non-mining activities in border areas. 
 
Foreign and Argentine firms face the same tax liabilities. 
In general, taxes are assessed on consumption, imports and 
 
BUENOS AIR 00000033  003 OF 008 
 
 
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 government of Argentina has established a number of 
investment promotion programs.  Those programs allow for VAT 
refunds and accelerated depreciation of capital goods for 
investors; offer tariff incentives for local production of 
capital goods; and include sectoral programs, free trade 
zones, and a special Foreign Trade Area in Tierra del Fuego, 
among other benefits.  A complete description of the scope 
and scale of Argentina,s investment promotion programs can 
be found at http://www.industria.gov.ar/.  Information about 
programs that specifically apply to small and medium 
businesses may be found at http://www.sepyme.gov.ar/. 
 
-------------------------------------- 
A.2.  Conversion and Transfer Policies 
-------------------------------------- 
 
Until the end of 2001, Argentine law offered a number of 
protections for free capital and currency transfers.  Law 
21382, Article 5 (as implemented by Decree 1853/1993), allows 
foreign investors to repatriate capital and remit earnings 
abroad at any time.  Article V of the United States-Argentina 
BIT also provides for free, prompt transfers related to 
investments.  In the wake of the 2001-2002 crisis, however, 
the government of Argentina instituted and subsequently 
modified an array of emergency transfer and currency 
conversion restrictions.  The number of new regulations and 
the frequency of policy changes have generated considerable 
uncertainty for investors. 
 
The Central Bank has 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.  Note:  In nominal terms, the peso appreciated 
22 percent against the USD in 2003, 13 percent in 2004, and 
did not change in relation to the USD during 2005. Central 
Bank Communication 46806 eliminated the requirement to have 
the Central Bank authorize principal payments on financial 
debt.  This communication also allows exporters to surrender 
export proceeds to financial institutions instead of only to 
the Central Bank.  Subsequently, Central Bank Circular 4128 
increased to USD 2 million per month the amount of foreign 
currency that an individual or company can purchase without 
Central Bank authorization.  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. 
 
Argentina imposed limited capital controls in July 2003 
through Decree 285/2003, which establishes a regimen for 
capital inflows and outflows.  The decree obliges investors 
to keep foreign currency inflows in the country for a period 
of at least 180 days.  Central Bank Circulars 3972 and 3973 
implement Decree 285/2003.  Circular 3972 mandates that any 
financing received from the financial or non-financial sector 
must remain in the country for a minimum of 180 days. 
Circular 3973 eases access to the foreign exchange market to 
repay financing in advance.  The Central Bank may continue 
easing capital controls in the future. 
 
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. 
------------------------------------ 
A.3.  Expropriation and Compensation 
------------------------------------ 
 
Article 4 of the United States-Argentina BIT states that 
investments shall not be expropriated or nationalized except 
 
BUENOS AIR 00000033  004 OF 008 
 
 
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. 
 
------------------------ 
A.4.  Dispute Settlement 
------------------------ 
 
The government of Argentina 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 government of Argentina issued Decree 
926/2003, which created two new agencies to carry out 
amicable negotiations under bilateral investment treaties, 
including the United States-Argentina BIT.  The "Amicable 
Negotiations Federal Council" (ANFC) made up of 
representatives of the Ministry of Foreign Affairs, the 
Ministry of Economy and the Federal Attorney General's 
Office, had a mission to devise the government's strategies 
and policies in negotiations with foreign investors and could 
approve proposals made during negotiations.  However, in July 
2003 that body was replaced by the &Unit for the 
Renegotiation and Analysis of Utility Contracts8 (UNIREN), 
which was created to serve essentially the same function, but 
which is presided over jointly by the Ministers of Planning 
and Economy.  The other entity created by Decree 926/2003 is 
the "Amicable Negotiations Proceedings Body," which works 
under the Federal Attorney General.  It receives investor 
complaints, gathers information and carries out negotiations 
with foreign investors. 
 
Domestic investment dispute adjudication is available through 
local courts or administrative procedures.  However, 
independent surveys indicate that public confidence in the 
Argentine judiciary remains weak.  Therefore, many foreign 
investors rely on private or international arbitration when 
those options are available.  Argentina has a strict 
bankruptcy law similar to that of the United States. 
However, initiating bankruptcy proceedings is more difficult 
in Argentina.  Creditors can participate in a Chapter 11-like 
procedure to determine the best means of recovering debts 
from a bankrupt firm.  Company directors are personally and 
criminally responsible in cases of fraud, although severe 
punishment for white-collar crime is rare.  There have been 
allegations of corruption in the administration of 
bankruptcies and the selection of bankruptcy trustees. 
 
As noted above, a number of U.S. investors have filed ICSID 
arbitration claims against the government of Argentina.  Most 
of these investors consider the January 2002 pesification of 
dollar-denominated contracts, and/or the ex post facto 
prohibition on contracts linked to foreign inflation indices, 
to be an effective expropriation of their investments.  Prior 
to pesification, some U.S. investors engaged in disputes with 
provincial governments over unforeseen changes in tax laws 
and liabilities (often in spite of tax-stability guarantees 
from provincial and federal authorities).  Customs treatment 
and the freeze on public utility rate changes have also 
provoked investment disagreements.  There were 36 disputes 
involving Argentina in international arbitration as of 
December 15, 2005, and the number is expected to grow in 
¶2006.  The amount claimed in these disputes exceeds USD 15 
billion.  However, several ICSID claimants, including at 
least one U.S. claimant, withdrew their claims during 2005 
after successful negotiations with the Argentine government. 
 
In addition, there are thousands of administrative and 
 
BUENOS AIR 00000033  005 OF 008 
 
 
judicial claims against the government of Argentina at the 
local level.  The government of Argentina is pressuring ICSID 
claimants who hold public service contracts to drop their 
claims in exchange for the re-negotiation of their contracts. 
 All 62 public service contracts were supposed to be 
re-negotiated by December 31, 2004, but only a few (less than 
five) were concluded by that date, and even those were 
concluded on a temporary basis.  The pace of contract 
renegotiations picked up in 2005, however.  By November 2005 
fifteen contracts had been renegotiated outside the formal 
renegotiation process while twenty-five had been renegotiated 
within that process.  The remaining twenty-two were still in 
negotiations as of this writing. 
 
There also remains substantial legal uncertainty about the 
value of pesified contracts and the legality of pesification. 
 Thouands of depositors have gone to court challenging the 
constitutionality of the pesification of their 
dollar-denominated bank accounts and have obtained judgments 
obligating their banks to repay them in dollars or in pesos 
at the market rate of exchange.  The Supreme Court, in a July 
2004 decision involving a province's deposits at a state 
bank, ruled that pesification was unconstitutional, but did 
not extend that ruling to other cases involving other 
depositors.  In another ruling, this time in late October 
2004, the Supreme Court ruled that pesification of a bank 
account was constitutional.  However, the five justices 
deciding the case issued four separate opinions that had 
little in common.  Additionally, lower courts in Argentina 
are not required to follow a Supreme Court decision except in 
the particular case ruled upon, and lower courts have largely 
ignored this decision and continue to issue orders to banks 
to pay depositors. 
 
--------------------------------------------- 
A.5.  Performance Requirements and Incentives 
--------------------------------------------- 
 
No performance requirements are aimed specifically at foreign 
investors.  Government incentives apply to both foreign and 
domestic firms.  The Ministry of Economy administers a 
complex trade-balancing regime involving quotas and tariffs 
for auto manufacturers based on minimum-content and other 
requirements.  Special regimes also apply to mining, oil and 
gas, and other natural resource sectors.  The special regimes 
allow producers to keep all (as in the case of mining) or 70 
percent of their foreign exchange revenues off-shore (as in 
the case of oil and gas, fisheries and forestry). 
 
--------------------------------------------- ----- 
A.6. Right to Private Ownership and Establishment 
--------------------------------------------- ----- 
 
Foreign and domestic investors have free and equal rights to 
establish and own businesses, or to acquire and dispose of 
interests in businesses without discrimination.  However, as 
noted above, in June 2003 Argentina enacted legislation 
limiting foreign ownership of "cultural goods," which 
includes media and Internet service providers companies, to 
30 percent.  The Embassy is monitoring a case in which U.S. 
media investors allege that the government of Argentina, 
citing the &cultural goods8 law, has refused to recognize 
their ownership stake.  An exception to the 30 percent limit 
is made for investors from those countries whose foreign 
investment regimes allow more than 30 percent foreign 
ownership of cultural goods.  This law also exempts media 
companies from "cramdown" rules in restructuring and 
bankruptcy. 
 
----------------------------------- 
A.7. Protection of Property Rights 
----------------------------------- 
 
Secured interests in property, including mortgages, are 
recognized and common in Argentina.  Such interests can be 
easily and effectively registered.  They also can be readily 
bought and sold.  However, since February 2002, the 
government of Argentina has continued to extend a temporary 
moratorium prohibiting financial institutions from 
foreclosing on delinquent mortgages on primary residences. 
 
BUENOS AIR 00000033  006 OF 008 
 
 
The last extension of the moratorium came on November 4, 
2005, and provided protection to homeowners' primary 
residences for another 120 days.  In another case, the 
government of Argentina intervened to prevent a secured 
creditor from repossessing leased locomotives from a railroad 
concessionaire, citing "public service" needs.  The 
government of Argentina has neither offered nor paid 
compensation for the continued retention of the locomotives. 
 
The government of Argentina adheres to most treaties and 
international agreements on intellectual property and belongs 
to the World Intellectual Property Organization and the World 
Trade Organization (WTO).  The Argentine Congress ratified 
the Uruguay Round agreements, including the provisions on 
intellectual property, in Law 24425 on January 5, 1995. 
However, enforcement of intellectual property rights is 
problematic in Argentina. 
 
Patents: 
 
Patent law is the weakest element in Argentina's intellectual 
property rights regime, and extension of adequate patent 
protection to pharmaceuticals has been a highly contentious 
bilateral issue.  In early 1997, the U.S. announced the 
suspension of 50 percent of Argentina's trade benefits under 
the Generalized System of Preferences (GSP) because of 
inadequate protection of pharmaceutical products.  In 
November 2000, after years of protracted debate, a new patent 
law took effect and a number of pharmaceutical patents were 
issued.  This law improved earlier Argentine patent 
legislation, but provides less protection than that called 
for in the Agreement on Trade-Related Aspects of Intellectual 
Property Rights (TRIPS).  In April 2002, the United States 
and Argentina reached an agreement with respect to most of 
the claims in a World Trade Organization (WTO) dispute 
brought by the United States with respect to Argentina's 
implementation of its TRIPS obligations.  Two issues, 
including the critical issue of data protection, remain 
unresolved.  The United States and Argentina have agreed to 
leave these issues within the WTO dispute settlement 
mechanism for action.  Legislation implementing the April 
2002 agreement was passed in December 2003.  However, certain 
U.S. and European pharmaceutical firms are concerned that 
provisions in the legislation could undercut the limited 
success they have achieved in protecting their products 
through judicial injunctions. 
 
Copyrights, Trademarks, Trade Secrets, and Semiconductor Chip 
Layout Design: 
 
The legal framework to protect intellectual property such as 
books, films, music, and software in Argentina has improved 
in recent years.  However, the economic crisis of 2002 led to 
an increase in the use of unlicensed software and optical 
media.  Argentine authorities continue their efforts to 
combat the piracy of videotape, software and other 
copyrighted material, but enforcement continues to be 
sporadic and pirated products are still 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.  The government has also improved the 
process for trademark registration.  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. 
 
------------------------------------------- 
A.8.  Transparency of the Regulatory Regime 
------------------------------------------- 
 
During the 1990s, the government of Argentina eliminated 
virtually all restrictions on domestic and foreign trade of 
 
BUENOS AIR 00000033  007 OF 008 
 
 
goods and services, as well as on financial markets.  These 
policies increased competition in many industries and 
sectors.  Argentine authorities, including the Ministry of 
Economy and a number of quasi-independent regulatory 
entities, have also acted in certain cases to foster 
competition and protect consumers, though not always in a 
transparent fashion. 
 
Frequent changes to the bankruptcy law during early 2002 
increased creditor insecurity.  In January 2002, the 
Argentine National Congress passed several amendments to the 
bankruptcy law that increased debtor's powers considerably, 
but the National Congress restored many of the law's earlier 
protections for creditors in May of that year. 
 
Other regulatory changes in 2002 added to creditor 
insecurity.  The government 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 government's 
discovery that the decree had been voided inadvertently 
months before came at a time when the government of Argentina 
was worried about its access to foreign exchange and the 
devaluation of the peso.  When the peso began to appreciate, 
the government of Argentina issued a new decree that gave the 
industry the same right to withhold 70 percent of revenues 
starting January 1, 2003, but the industry remains liable for 
failing to repatriate 100 percent of its revenues during the 
13-month period from December 2001 and December 2002.  The 
Central Bank opened proceedings against some oil and gas 
producers in 2004 for alleged criminal breach of the exchange 
regime. 
 
The government's actions since 2003 have not calmed investor 
concerns about the regulatory environment.  The government of 
Argentina issued a decree de-pesifying foreign 
currency-denominated contracts of foreign firms doing 
business in Argentina in 2003, but then withdrew the decree 
and said it was a mistake.  In the energy sector, the 
government of Argentina took measures to avoid energy 
shortages that arose from the increase in demand for natural 
gas and electricity in 2004: 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 
government of Argentina has also pressured companies to 
invest in the expansion of natural gas pipelines, and has 
pressured power companies to invest compensation owed them by 
the government of Argentina in power plants the government of 
Argentina wishes to construct.  There is a concern that the 
abovementioned GOA actions in the energy sector, coupled with 
the GOA's attempts to control retail prices of fuels, have 
created disincentives for companies to invest in energy 
exploration and infrastructure.  Inadequate investment in 
those areas could in turn result in energy supplies not 
keeping pace with demand generated by Argentina's rapid 
economic growth. 
 
In general, national taxation rules do not discriminate 
against foreigners or foreign firms (e.g., asset taxes are 
applied to equity possessed by both domestic and foreign 
entities).  Nevertheless, a number of these taxes may impact 
their investment decisions.  As noted above, in June 2003, 
the government of Argentina announced that it would review 
more closely the tax declarations of foreign corporations 
operating in Argentina.  The professed aim of this measure is 
to crack down on the use of offshore shell corporations to 
shelter profits and assets from taxation. 
 
At the national level, there are two major taxes: the income 
tax and value added tax ("VAT").  The income tax law presumes 
that every company earns a profit, and based on this 
presumption, all firms are required to pay one percent of the 
value of their assets involved in the production process to 
the state.  If a company is later able to establish that it 
did not earn a profit, the company will be reimbursed in five 
 
BUENOS AIR 00000033  008 OF 008 
 
 
years.  The VAT is set at 21 percent for most products.  The 
VAT is 10.5 percent for interest and commissions on debts 
taken by public transportation companies, fruits, vegetables, 
honey, newspapers and magazines, and some capital goods.  The 
VAT is 27 percent for natural gas, electricity, water and 
sewage services.  Exporters should receive VAT rebates, but 
many companies have experienced extensive delays in the 
receipt of these rebates. 
 
At the provincial level, the system of provincial sales taxes 
has encouraged the vertical integration of firms.  Investors 
also have expressed increasing concern over the incidence of 
municipal "supply taxes".  The Argentine constitution gives 
municipalities the right to set fees for the services that 
they provide, including supply taxes.  Many investors allege 
that the supply tax fees charged by municipalities do not 
correspond to the services provided.  Municipalities have 
levied fees on the food industry, in particular, through a 
range of sanitary controls that occasionally overlap national 
and provincial regulations.  Supply tax fees have affected 
other industries as well.  Municipalities in Buenos Aires and 
Cordoba provinces have generated the most serious complaints. 
 Many municipalities have begun imposing fees on any 
advertising visible from the public street, including 
in-store promotion materials, such as soft drink coolers, 
ashtrays and the packaging of individual consumer items, such 
as batteries. 
GUTIERREZ