VZCZCXYZ0009
RR RUEHWEB

DE RUEHBU #0034/01 0061417
ZNR UUUUU ZZH
R 061417Z JAN 06
FM AMEMBASSY BUENOS AIRES
TO RUEHAC/AMEMBASSY ASUNCION 5246
RUEHBR/AMEMBASSY BRASILIA 5010
RUEHLP/AMEMBASSY LA PAZ JAN MONTEVIDEO 5197
RUEHSG/AMEMBASSY SANTIAGO 4832
RUEHRI/AMCONSUL RIO DE JANEIRO 1812
RUEHSO/AMCONSUL SAO PAULO 2698
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RHEHAAA/WHITE HOUSE WASHINGTON DC

UNCLAS SECTION 01 OF 04 BUENOS AIRES 000034 
 
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 2 OF 2) 
 
REF: 05 STATE 202943 
 
The following is the second part of Embassy Buenos Aires' 
2006 Investment Climate Statement for Argentina.  Begin text 
of Part II: 
 
--------------------------------------------- --------- 
A.9. Efficient Capital Markets and Portfolio Investment 
--------------------------------------------- ---------- 
 
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 and securities firms are well represented in 
Argentina and are among the most dynamic players in the local 
capital markets.  The private pension fund system -- 
consolidated in 1995 -- provided an important growing base 
for capital markets until the beginning of the recent crisis. 
 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. 
 
------------------------- 
A.10.  Political Violence 
------------------------- 
 
Protests, marches, and roadblocks directed at the national, 
provincial and municipal governments are 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.  During 2004, 
however, in what appear to have been mostly unrelated 
incidents, unknown persons placed thirteen bombs, which 
either exploded or were detonated by police, and four other 
incendiary devices in banks and other commercial 
establishments.  One bank guard was killed and a policeman 
seriously injured in December 2004.  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. 
 
------------------- 
A.11.a.  Corruption 
------------------- 
 
Government corruption and private sector business fraud are 
the subject of frequent complaints from U.S. investors, and 
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.  Surveys by Transparency International 
and other business and academic groups have contributed to 
more open debate about corruption and fraud, however.  Some 
foreign firms tend to be at a competitive disadvantage since, 
in certain industries, they are more likely to pay taxes than 
their domestic competitors.  There are strong indications 
that the government of Argentina is trying to change the 
culture of non-payment 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 over 118.5 billion pesos in 2005 (compared 
with around 98.3 billion in 2004 and 72 billion in 2003), 
with revenues increasing from all taxes. 
 
The government of Argentina maintains that official 
corruption has decreased dramatically as a result of the 
privatization of most state enterprises over the past decade. 
 
BUENOS AIR 00000034  002 OF 004 
 
 
 Argentina is a party to the OAS Anti-Corruption Convention 
and ratified the OECD Anti-Corruption Convention in 2001. 
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.  Press reports indicate, however, that some 
public officials have refused to provide the required 
disclosure statements on the grounds that compliance would 
expose them to kidnapping attempts.  The anti-corruption 
office also carries out investigations into cases of alleged 
corruption involving Executive branch officials. 
 
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. 
 
---------------------------------------- 
A.11.b. Bilateral Investment Agreements 
---------------------------------------- 
 
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.  Argentina does not have a bilateral tax 
treaty (Treaty for the Mutual Avoidance of Double Taxation) 
with the United States. 
 
Over the past decade, the government of Argentina has signed 
over 50 bilateral treaties for the protection and promotion 
of investment, including with all of its major trade and 
investment partners.  Forty-four of these agreements have 
been ratified by the Argentine Congress and are in force. 
More information regarding Argentina's bilateral tax and 
investment treaties is available at www.infoleg.gov.ar. 
 
 
--------------------------------------------- -------- 
A.11.c.  OPIC and other Investment Insurance Programs 
--------------------------------------------- -------- 
 
The government of Argentina signed a comprehensive agreement 
with the Overseas Private Investment Corporation (OPIC) in 
¶1989.  Argentina is also a member of the World Bank's 
Multilateral Investment Guarantee Agency (MIGA). 
 
-------------- 
A.11.d.  Labor 
-------------- 
 
Argentine workers are among the most highly educated in Latin 
America.  Argentine workers were also relatively well paid 
prior to the peso devaluation in January 2002.  High 
inflation following the devaluation eroded the value of their 
wages in 2002.  Wages in dollar terms are now more 
competitive, even taking into account Argentina's relatively 
high social security charges and other taxes.  As of the 
third quarter of 2005, the official unemployment rate was 
11.1 percent, but this number excludes recipients of 
government assistance to unemployed heads of households.  If 
those recipients were included, unemployment would be 
approximately 14.1 percent. 
 
The government of Argentina passed a modest labor reform law 
in 2000 to address rigidities in the labor market (i.e., by 
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.  The 
government passed a new labor law reform in 2004, which did 
not result in significant changes to the existing regime. 
 
--------------------------------------- 
 
BUENOS AIR 00000034  003 OF 004 
 
 
A.11.e. Foreign Trade Zones/Free Ports 
--------------------------------------- 
 
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 Areas (SCAs), 
which are located only in 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 production and employment 
objectives. 
 
The SCA program applies only to Tierra del Fuego Province. 
The government reduced some SCA benefits in the early 1990s. 
Most 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. 
 
 
--------------------------------------------- 
A.11.f. Foreign Direct Investment Statistics 
--------------------------------------------- 
 
The United States and Spain are the two largest sources of 
foreign investment in Argentina.  U.S. investment is 
concentrated in financial services, agribusiness, energy, 
petrochemicals, food processing, household products, and 
motor vehicle manufacturing.  Many U.S. firms have 
substantially written-down the value of their Argentine 
investments in response to the devaluation and pesification 
of previously dollar-denominated contracts.  Five U.S. power 
companies elected to abandon their Argentine investments in 
2003 and 2004, to reduce continuing losses.  Other important 
sources of investment capital include Chile, Italy, France, 
U.K., Germany, Canada, and Japan.  During a visit to 
Argentina by PRC President Hu Jintao in November 2004, public 
and private Chinese companies signed letters-of-intent for 
sizeable investments over the coming decade in Argentina,s 
transportation, hydrocarbons, mining, construction, 
telecommunications, and tourism sectors.  Chinese investment 
in Argentina to date, however, has been relatively light. 
 
Important foreign investors in Argentina include AES, ALCAN, 
American Airlines, Barrick, Bell South, BP, Brahma, British 
 
BUENOS AIR 00000034  004 OF 004 
 
 
Gas, Bristol-Myers, Bunge, Cargill, Carrefour, Cencosud, 
CDSI, Chevron-Texaco, CitiGroup, CMS, Coca-Cola, Crown Cork, 
Cyanamid, Daimler-Chrysler, Delta, Diamond Shamrock, Dow 
Chemical, Dupont, Duke Energy, Eastman Kodak, Eli Lilly, 
ExxonMobil, Federal Express, Fiat, Fleet-Boston, Ford, Four 
Seasons, France Telecom, General Electric, General Mills, 
General Motors, Gillette, HP, Hilton, Honeywell, IBM, John 
Deere, Kimberley Clark, Kraft, Lockheed-Martin, Marriott, 
McDonald's, Merck, Motorola, Nabisco, Pepsi, Petrobras, 
Peugeot, Pfizer, Philip Morris, PriceWaterhouseCoopers, 
Procter & Gamble, Renault, Repsol, Scania, Schering-Plough, 
Shell, Sheraton, Swift Armour, Squibb, TCI, Telefonica of 
Spain, Tyco Electronics, 3M, Toyota, Union Camp, United, 
United Technologies, UPS, Volkswagen, Wal-Mart, and Xerox. 
 
Argentine firms increasingly invested abroad during the 1990s 
(particularly in Brazil, Paraguay and Uruguay), although the 
country has remained a large net recipient of foreign direct 
investment. 
 
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. 
GUTIERREZ