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DE RUEHPE #0117/01 0111846
ZNR UUUUU ZZH
R 111846Z JAN 06
FM AMEMBASSY LIMA
TO RUEHC/SECSTATE WASHDC 8017
INFO RUEHBO/AMEMBASSY BOGOTA 2815
RUEHAC/AMEMBASSY ASUNCION 1417
RUEHBR/AMEMBASSY BRASILIA 6412
RUEHMN/AMEMBASSY MONTEVIDEO 8832
RUEHQT/AMEMBASSY QUITO 9887
RUEHLP/AMEMBASSY LA PAZ JAN SANTIAGO 0038
RUEHCV/AMEMBASSY CARACAS 8866
RUEHBU/AMEMBASSY BUENOS AIRES 2165
RUEHME/AMEMBASSY MEXICO 3239
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHC/DEPT OF LABOR WASHINGTON DC
RUCPCIM/CIMS NTDB WASHDC

UNCLAS LIMA 000117 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR WHA/AND, WHA/EPSC, EB/IFD/OIA 
TREASURY FOR OASIA/INL 
COMMERCE FOR 4331/MAC/WH/MCAMERON 
DEPT PASS TO USTR 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ETRD ELAB KTDB PGOV OPIC USTR PE
SUBJECT: Peru's Investment Climate Statement 2006 
 
REF: 05 State 201904 
 
¶1. The following is Post's submission of Peru's 2006 
Investment Climate Statement, as requested in reftel. 
 
Openness to Foreign Investment 
------------------------------ 
 
¶2.  The Peruvian government seeks to attract investment -- 
both foreign and domestic -- in nearly all sectors of the 
economy.  In December 2005, Peru concluded negotiations of a 
free trade agreement with the United States, which could be 
in force by January 2007.  A free trade agreement will 
enable Peru to attract additional investment by reducing 
barriers to trade, establishing proper customs procedures 
and improving the dispute settlement process. 
 
¶3.  During the early 1990s, the Peruvian government promoted 
economic stabilization and liberalization policies through 
the lowering trade barriers, the lifting restrictions on 
capital flows and the opening the economy to foreign 
investors.  Peru experienced marked growth in foreign 
investment from 1993-1998.  Economic reform and 
privatization slowed in the late 1990s however, which led to 
a discernible drop in direct and indirect foreign investment 
flows.  Investment remained stagnant following the collapse 
of President Alberto Fujimori's government in November 2000, 
and through the period of an interim government and the 
election of President Alejandro Toledo in 2001. 
 
¶4.  During his tenure, President Toledo has implemented 
several pro-investment policies.  In April 2002, the 
government established ProInversion, building on the 
foundation of COPRI, the privatization agency created in 
¶1991.  The new agency seeks to be a "one-stop shop" for 
current and potential investors.  A difficult political 
climate and controversial actions by the judiciary, some 
regulatory agencies and Congress, however, led to the 
indefinite postponement of some major planned privatizations 
in mid-2002.  However, since 2004, ProInversion has 
successfully completed both concessions and privatizations 
of state-owned enterprise and natural resources.  In 2004, 
Las Bambas, a gold and mining operation, was concessioned to 
Xstrata TLC, a Swiss company, for $122 million.  In 2005, 
Bayovar, a state-owned phosphate plant, was concessioned to 
a Brazilian company for more than $300 million.  Most 
recently, ProInversion granted British-owned Rio Tinto a 
concession for the La Granja copper mine for $22 million. 
 Additionally, in 2004-2005, the Ministry of Mines and 
Energy granted 15 concessions to foreign oil exploration 
companies, including three U.S. companies, along the 
northern coast and in the jungle. 
 
¶5.  In addition to the 1993 Constitution (enacted January 1, 
1994), major laws concerning foreign direct investment in 
Peru include the Foreign Investment Promotion Law 
(Legislative Decree (DL) 662 of September 1991) and the 
Framework Law for Private Investment Growth (DL 757 of 
November 1991).  The two 1991 laws were implemented by 
Supreme Decree 162-92-EF (October 1992).  Two other 
important laws are the Private Investment in State-Owned 
Enterprises Promotion Law (DL 674) and the Private 
Investment in Public Services Infrastructure Promotion Law 
(DL 758).  Under Article 63 of the Constitution, "national 
and foreign investment are subject to the same terms" and 
are permitted in almost all economic sectors. 
 
¶6.  The 1993 Constitution guarantees national treatment for 
foreign investors.  The Peruvian government does not screen 
foreign direct investment nor does it require foreign 
investors to register their investments.  Foreign investment 
does not require prior approval, except in banking (and 
domestic investment as well, for regulatory reasons) and 
defense-related industries.  Foreign investors are advised 
to register with ProInversion to obtain the guarantee that 
they will be able to repatriate capital, profits, and 
royalties.  Foreigners are legally forbidden from owning 
majority interest in radio and television stations in Peru; 
nevertheless, foreigners have in practice owned controlling 
interests in such companies.  In addition, under the 
Constitution, foreign interests cannot "acquire or possess 
under any title, mines, lands, forests, waters, or fuel or 
energy sources" within 50 kilometers of Peru's international 
borders.  However, foreigners can obtain concessions and 
rights within the restricted areas with the authorization of 
a supreme resolution approved by the Cabinet.  Such 
authorization requires a favorable opinion from the Joint 
Command of the Armed Forces.  All investors -- domestic and 
foreign -- need prior approval before investing in weapons 
manufacturing industries. 
 
¶7.  In 1991, the Peruvian government began an extensive 
privatization program, encouraging foreign investors to 
participate.  From 1991 through September 2005, 
privatization revenues totaled $9.4 billion, of which 
foreign investors were responsible for the vast majority. 
Over three quarters of these transactions took place in the 
1994-1997 period.  Through September 2005, privatization and 
concessions proceeds totaled $35.1 million, and generated 
investment commitments of $1.3 billion.  The Toledo 
government committed to a broad program of some $3 billion 
in further privatizations and concessions over its five year- 
term, but faced strong popular and political opposition by 
mid-2002.  The government has made only limited progress on 
privatizations since then, and prospects for future direct 
privatizations are not encouraging.  The government has 
consequently shifted to a strategy of promoting multi-year 
concessions as a means of attracting investment into major 
projects. 
 
¶8.  In June 2004, the Congress passed a law to exclude the 
state-owned oil company PetroPeru from privatization and 
authorized PetroPeru to conduct exploration and production 
activities.  This modified the government's policy since the 
early 1990s, when it sold all of PetroPeru's exploration and 
production units and a major oil refinery.  Under this new 
law, the government still has an option of granting 
concessions on remaining PetroPeru assets, including one 
pipeline and several refineries.  In December 2005, 
PetroPeru introduced a bill in the Congress to resume 
exploration and production activities and to be freed from 
contracting approval by CONSUCODE, the state contracting 
agency.  The bill has passed the Economic Commission and is 
still pending debate by the Plenary.  It is not expected to 
pass. 
 
¶9.  Under the Constitution, foreign investors have the same 
rights as national investors to benefit from any investment 
incentives, such as tax exemptions. 
 
Conversion and Transfer Policies 
-------------------------------- 
 
¶10.  Under Article 64 of the 1993 Constitution, the Peruvian 
government guarantees the freedom to hold and dispose of 
foreign currency; hence, there are no foreign exchange 
controls in Peru.  All restrictions on remittances of 
profits, dividends, royalties, and capital have been 
eliminated, although foreign investors are advised to 
register their investments with ProInversion (as noted 
above) to ensure these guarantees.  Exporters and importers 
are not required to channel foreign exchange transactions 
through the Central Reserve Bank of Peru and can conduct 
transactions freely on the open market.  Anyone may open and 
maintain foreign currency accounts in Peruvian commercial 
banks.  U.S. firms have reported no problems or delays in 
transferring funds or remitting capital, earnings, loan 
repayments or lease payments since Peru's economic reforms 
of the early 1990s. 
 
¶11.  The 1993 Constitution guarantees free convertibility of 
currency.  There is, however, a legal limit on the amount 
that private pension fund managers can invest in foreign 
securities.  In May 2004, the Central Bank increased this 
limit from 9 percent to 10.5 percent.  The low limit has 
created local market distortions, trapping liquidity in Peru 
that is diverted into local equities and bonds, driving up 
their prices to artificially high levels. 
 
¶12.  The Central Reserve Bank of Peru is an independent 
institution, free to manage monetary policy to maintain 
financial stability.  The Central Bank's primary goal is to 
maintain price stability, via a targeted rate of inflation 
During most of 2005 (January through end-August), the 
Peruvian Sol trended slightly down towards 3.25 to the 
dollar, as the Central Bank supported the dollar amid 
ballooning exports and emigrants' remittances.  At the end 
of August 2005, the U.S. Federal Reserve began to increase 
its federal fund rate from 1 percent to 3 percent, matching 
the Peruvian Central Bank's interest rate.  When the U.S. 
federal interest rate increased to more than 3 percent in 
October, it became more profitable for institutional 
investors to buy dollars and deposit them abroad, accounting 
the appreciation of the dollar versus the sol.  This trend 
continues, as the U.S. federal fund rate is now at 4.25 
percent through December 2005.  Additionally, the start of 
the Peruvian electoral campaign cycle in October 2005 and 
the uncertainly surrounding the upcoming Presidential 
elections have caused investors to hedge their bets and 
purchase additional dollars. 
 
Expropriation and Compensation 
------------------------------ 
 
¶13.  According to the Constitution, the Peruvian government 
can only expropriate private property on public interest 
grounds (such as for public works projects) or for national 
security.  Any expropriation requires the Congress to pass a 
specific act.  The Government of Peru has expressed its 
intention to comply with international standards concerning 
expropriations.  Adequate payment to owners of agricultural 
lands expropriated by the Peruvian government in the late 
1960s/early 1970s is still an issue. 
 
Dispute Settlement 
------------------ 
 
¶14.  Dispute settlement continues to be problematic in Peru, 
although the GOP has taken steps in 2005 to improve the 
dispute settlement process.  In December 2004, with 
assistance from USAID, the GOP established eight commercial 
courts (seven courts of first instance or juzgados and one 
appeals court or sala to rule on investment disputes.  These 
courts officially began functioning in April 2005.   The GOP 
established five additional juzgados in October 2005, and 
another ten, plus an additional appeals court, will begin 
operations in Lima by May 2006.  The commercial courts have 
substantially improved the process for commercial disputes. 
Prior to the existence of the commercial courts, it took an 
average of two years to resolve a commercial case through 
the civil court system.  These new courts, which have 
specialized judges, have reduced the amount of time to 
resolve one case to two months, a reduction of 90 percent. 
Additionally, the enforcement of court decisions has been 
reduced from 36 months to 3-6 months.  While about 40 
percent of decisions are appealed, most of these are decided 
at the appeals level; very few are appealed to the Supreme 
Court level. The GOP will continue to train judges on 
commercial law and expects this rate of resolution and 
enforcement to be maintained.  While these courts currently 
only operate in Lima, the GOP has plans to expand into other 
areas of Peru beginning in 2006.  The Judiciary has approved 
the opening of two regional courts, one in Arequipa and one 
in Huancayo.  There are also plans to open courts in Callao 
and the northern district of Lima, pending Judiciary 
approval. 
 
¶15.  The criminal and civil courts of first instance and 
appeal are located in the provinces and in Lima.  The 
Supreme Court is located in Lima.  In principle, secured 
interests in property, both chattel and real, are 
recognized.  However, the judicial system is often extremely 
slow to hear cases and to issue decisions.  In addition, 
court rulings and the degree of enforcement have been 
difficult to predict.  The capabilities of individual judges 
vary substantially, and allegations of corruption and 
outside interference in the judicial system are common.  The 
Peruvian appeals process also tends to delay final 
decisions.  As a result, foreign investors, among others, 
have found that contracts are often difficult to enforce in 
Peru.  The exposure in 2000 of a network of corrupt judges 
controlled by Fujimori advisor Vladimiro Montesinos led to 
promises by subsequent governments to address corruption and 
reform the judiciary, but progress has been slow. 
 
¶16.  Under the 1997 Law of Conciliation (DL 26872), which 
went into effect on January 1, 2000, disputants in many 
types of civil and commercial matters are required to 
consider conciliation before a judge can accept a dispute to 
be litigated.  Private parties often stipulate arbitration 
to resolve business disputes, as a way to avoid involvement 
in judicial processes. 
 
¶17.  Peru's commercial and bankruptcy laws have proven 
difficult to enforce through the courts.  The Toledo 
government established an administrative bankruptcy 
procedure under INDECOPI (the National Institute for the 
Defense of Free Competition and the Protection of 
Intellectual Property) to facilitate the process.  This is 
now under review, since, in practice, the administrative 
bankruptcy process has proven to be slow, often dragging on 
for years at a time, and subject to judicial intervention. 
The creditor hierarchy is similar to that established under 
U.S. bankruptcy law, and monetary judgments are usually made 
in the currency stipulated in the contract. 
 
¶18.  A law permitting international arbitration of disputes 
between foreign investors and the government or state- 
controlled firms was promulgated in December 1992.  The same 
proviso was later included in the 1993 Constitution.  As a 
result, the Government of Peru accepts binding international 
arbitration of investment disputes in accordance with 
national legislation or international treaties to which it 
is a party.  Although Peru theoretically accepts binding 
arbitration, on a few occasions over the past three years, 
one involving a U.S. company, parastatal companies and 
Government Ministries disregarded unfavorable judgments. 
Previously, the Government of Peru turned these arbitration 
cases over to the judiciary, where they were 
bureaucratically delayed until the companies conceded the 
cases.  However, effective July 2005, the Supreme Court 
ruled that all arbitration findings and awards are final and 
not subject to appeal.  In December 2005, the U.S. company 
received payment of a previously disputed arbitral award of 
$1.9 million. 
 
¶19.  Peru is a party to the Convention on the Recognition 
and Enforcement of Foreign Arbitral Awards (the New York 
Convention of 1958), and to the International Center for the 
Settlement of Investment Disputes (the Washington Convention 
of 1965).  Disputes between foreign investors and the 
Government of Peru regarding pre-existing contracts must 
still be submitted to national courts.  However, investors 
who conclude a juridical stability agreement for additional 
investments may submit disputes with the government to 
national or international arbitration if stipulated in the 
agreement.  In 2005, the government resolved a high-level 
ATPDEA dispute by abiding by the decision of an arbitration 
panel in favor of foreign investors. 
 
¶20.  Several private organizations, including the 
Universidad Catolica and the Lima Chamber of Commerce, 
operate private arbitration centers.  The quality of these 
centers varies, however, and investors should choose a venue 
for arbitration carefully.  In one 2001 case involving the 
Lima Chamber of Commerce's arbitration center, a U.S. 
investor discovered irregularities in the way the case had 
been handled by the center. 
 
¶21.  The Peruvian government committed to resolve nine 
commercial disputes as a condition of the U.S granting trade 
benefits under the Andean Trade Promotion and Drug 
Eradication Act (ATPDEA) in 2002.  In April 2004, the 
Peruvian government provided USTR with "roadmaps" for the 
resolution of several of these investment disputes.  As of 
December 2005, three ATPDEA commercial disputes remain. 
 
¶22.  In December 2005, Peru and the United States concluded 
negotiations on a free trade agreement.  Once signed and 
ratified, the agreement is expected to come into force in 
January 2007.  The agreement includes a chapter on dispute 
settlement and, upon implementation, should further clarify 
the resolution process in Peru. 
 
Performance Requirements and Incentives 
--------------------------------------- 
 
¶23.  Peru offers both foreign and national investors legal 
and tax stability agreements to stimulate private 
investment.  These agreements guarantee that the statutes on 
income taxes, remittances, export promotion regimes (such as 
drawback), administrative procedures, and labor hiring 
regimes in effect at the time of the investment contract 
will remain unchanged for that investment for 10 years.  To 
qualify, an investment must exceed $10 million in the mining 
and hydrocarbons sectors or $5 million in other sectors 
within two years.  An agreement to acquire more than 50 
percent of a company's shares in the privatization process 
may also qualify an investor for a juridical stability 
agreement, provided that the infusion will expand the 
installed capacity of the company or enhance its 
technological development. 
 
¶24.  There are no performance requirements that apply 
exclusively to foreign investors.  Legal stability 
agreements are subject to Peruvian civil law, which means 
they cannot be altered unilaterally by the government. 
Investors are also offered protection from liability for 
acquiring state-owned enterprises. 
 
¶25.  Laws specific to the petroleum and mining sectors also 
provide assurances to investors.  However, in 2000, the 
government modified the General Mining Law, substantially 
reducing benefits to investors in that sector.  Among the 
changes were: a reduction in the term concessionaires are 
granted to achieve the minimum annual production; an 
increase in fees for holding non-productive concessions; an 
increase in fines for not achieving minimum production 
within the allotted time; a reduction in the maximum 
allowable annual accelerated depreciation; and revocation of 
the income tax exemption for reinvested profits.  The 
changes do not affect those investors who have signed legal 
stability agreements with the government. 
 
¶26.  Parties may freely negotiate contractual conditions 
related to licensing arrangements and other aspects of 
technology transfer without prior authorization.  Registry 
of a technology transfer agreement is required for a payment 
of royalties to be counted against taxes.  Such registration 
is automatic upon submission to ProInversion. 
 
¶27.  Current law limits foreign employees to no more than 20 
percent of the total number of employees in a local company 
(whether owned by foreign or national interests), and 
restricts their combined salaries to no more than 30 percent 
of the total company payroll.  However, DL 689 (November 
1991) provides a variety of exceptions to these limits.  For 
example, a foreigner is not counted against a company's 
total if he or she holds an immigrant visa, has a certain 
amount invested in the company (currently about $4,000) or 
is a national of a country that has a reciprocal labor or 
dual nationality agreement with Peru.  Foreign banks and 
service companies, and international transportation 
companies are also exempt from these hiring limits, as are 
all firms located in free trade zones.  Furthermore, 
companies may apply for exemption from the limitations for 
managerial or technical personnel. 
 
Right to Private Ownership and Establishment 
-------------------------------------------- 
 
¶28.  Foreign and domestic entities are generally permitted 
the right to establish and own business enterprises and to 
engage in most forms of remunerative activity.  Subject to 
the restrictions listed earlier in this document, both 
foreign and domestic entities may invest in any legal 
economic activity -- including foreign direct investment, 
portfolio investment, and investment in real property. 
Private entities may generally freely establish, acquire, 
and dispose of interests in business enterprises. In the 
case of some privatized companies deemed important by the 
government, privatization agency ProInversion has included a 
so-called "golden share" clause in the sales contract, which 
allows the government to veto a potential future purchaser 
of the privatized assets. 
 
Protection of Property Rights 
----------------------------- 
 
¶29.  As noted in the Dispute Settlement section, in 
principle, secured interests in property (both chattel and 
real) are recognized.  However, the Peruvian judicial system 
is often very slow to hear cases and to issue decisions, 
outcomes have been difficult to predict and enforce, and 
corruption is frequently alleged.  The Peruvian appeals 
process also delays final outcomes of cases.  Thus, foreign 
investors, among others, have found that contracts are often 
difficult to enforce in Peru.  Improving the judicial system 
is one of President Toledo's top stated priorities. 
 
¶30.  Peru belongs to the World Trade Organization (WTO) and 
the World Intellectual Property Organization (WIPO).  It is 
also a signatory to the Paris Convention, Bern Convention, 
Rome Convention, Phonograms Convention, Satellites 
Convention, Universal Copyright Convention, the World 
Copyright Treaty, the World Performances and Phonographs 
Treaty and the Film Register Treaty.  After two years on the 
United States government's "Priority Watch List" under the 
Special 301 provisions of the 1988 Trade Act, Peru was 
lowered to the "Watch List" in 2001 following steps on the 
part of the Government of Peru to address intellectual 
property rights (IPR) piracy.  Peru remains on the Watch 
List due to concerns about continued high rates of copyright 
piracy and inadequate enforcement of IPR laws, particularly 
with respect to the relatively weak penalties that have been 
imposed on IPR violators.  Although the Peruvian Government 
in July 2004 increased the minimum penalty for piracy to 
four-year's imprisonment, there have yet to be any 
convictions under the new law.  Other factors contributing 
to continued placement on the "Watch List" include Peru's 
lack of second-use patent protection for pharmaceuticals and 
a lack of protection for confidential test data that is 
submitted for the marketing approval of pharmaceutical and 
agrochemical products. 
 
¶31.  Peru's 1996 Industrial Property Rights Law provides an 
effective term of protection for patents and prohibits 
devices that decode encrypted satellite signals, along with 
other improvements.  Peruvian law does not provide for 
pipeline protection for patents or protection from parallel 
imports. Although Peruvian law provides for effective 
trademark protection, counterfeiting of trademarks and 
imports of pirated merchandise are widespread. 
 
¶32.  Peru's Copyright Law is generally consistent with the 
TRIPS Agreement.  However, textbooks, books on technical 
subjects, audiocassettes, motion picture videos and software 
are widely pirated.  While the government, in coordination 
with the private sector, has conducted numerous raids over 
the last few years on large-scale distributors and users of 
pirated goods and has increased other types of enforcement, 
piracy continues to be a significant problem for legitimate 
owners of copyrights in Peru. 
 
Transparency of Regulatory System 
--------------------------------- 
 
¶33.  The transparency and independence of regulatory 
processes have become central issues for foreign investors 
in Peru.  Many of the central government entities with which 
foreign firms must deal -- including the entities that 
maintain the company registry and supervise securities and 
exchanges (CONASEV), handle privatization and investment 
issues (ProInversion), and handle competition policy and 
intellectual property matters (INDECOPI) -- have procedures 
that are relatively transparent and predictable.  However, 
several foreign pharmaceutical companies, as well as the 
motion picture and music industry, continue to face 
increasing levels of piracy of their products, highlighting 
that INDECOPI, SUNAT and the Peruvian National Police are 
not effectively protecting and upholding patents.  Banks, 
insurance companies and private pension funds are regulated 
primarily by the Superintendency of Banking and Insurance 
(SBS), which is charged with determining the qualifications 
of potential market entrants, and regulating firms once they 
have begun operations.  SBS regulations are also seen as 
being transparent. 
 
¶34.  When the GOP privatized state-owned monopolies in the 
areas of telecommunications, electrical generation and 
distribution, and the hydrocarbons sector in the late 1990s, 
the GOP established regulatory institutions to oversee the 
newly private sectors.  Several of these regulatory 
institutions, including telecommunications regulator OSIPTEL 
and energy sector regulator OSINERG, are inexperienced and 
slow.  The delays and lack of predictability in their 
rulings have in some cases been notable impediments to doing 
business in Peru. 
 
¶35.  In 2004-2005, two U.S. companies faced competitive 
disadvantages over OSIPTEL's very slow process for seeking 
regulation of the excessively high mobile termination rates 
of the market leader.  In December 2005, however, OSIPTEL 
published a new law that makes Peru's high mobile 
termination rates comparable to international rates over a 
three-year period.  Two U.S. companies have encountered 
problems with the  energy sector regulator (OSINERG) over 
its hesitancy to provide clear regulation for the energy 
sector.  Some agencies, including the tax authority (SUNAT), 
OSIPTEL, the General Directorate for Civil Aviation (DGAC) 
and the transportation regulator (OSITRAN), have been 
subject to politically motivated government intervention in 
their technical operations.  In 2005, a small U.S. company, 
funded by an OPIC guarantee, was forced out of business due 
to unfair competition when the DGAC authorized the Peruvian 
Air Force to fly cheaper priced civic flights. 
 
¶36.  The Toledo government replaced the heads of all 
regulatory agencies, but improvements in transparency have 
been uneven. 
 
¶37.  U.S. firms have complained that the autonomous tax 
authority's (SUNAT) aggressive behavior and interpretation 
of law are often contrary to the spirit of the law and 
intent of government policies, complicating normal business 
operations.  The remuneration of SUNAT employees is 
determined, in part, by the theoretical tax liability they 
uncover in audits.  While the U.S. Embassy has not received 
complaints that SUNAT employees are soliciting bribes for 
lower tax assessments, this incentive system has sometimes 
produced convoluted and unpredictable interpretations of the 
tax law. 
 
¶38.  Businesses point out that SUNAT's retroactive 
reinterpretation of regulations and laws, its levying of 
disproportionate fines, and initiation of full company 
audits when companies request a refund or legal revaluation 
of assets for depreciation purposes, create additional 
investment and trade barriers.  In one case, a U.S. firm 
unwittingly requested an improper drawback of $1,345, only 
to face SUNAT fines of $645,000.  Although the case was 
resolved, new legislation was needed to correct the problem. 
In instances involving airline fuels, certain minerals, and 
other products, SUNAT declared that these goods sold abroad, 
which under Peruvian government policy are exempted from 
taxes, were not considered exports and were therefore 
subject to VAT.  Two recent laws were necessary to correct 
this practice for airline fuels and services.  SUNAT often 
does not follow standard international practice in the way 
it taxes new activities.  To correct these problems, the 
independent tax tribunals act to check any abuses by SUNAT. 
In 2004, the GOP established a tax ombudsman who must 
approve SUNAT's request to appeal adverse tax tribunal 
decisions.  In the past two years, the tax ombudsman has 
acted in several cases to end unwarranted litigation of 
disputed assessments.  In 2005, a U.S. company won long- 
standing tax cases against SUNAT as a result of these 
improvements. 
 
¶39.  A 2004 World Bank study found that starting a business 
takes an average of 98 days in Peru, among the longest in 
the Western Hemisphere.  Various procedures -- such as 
obtaining building licenses or certificates of occupancy -- 
require many steps.  Municipal authorities issue most 
licenses and requirements vary widely by locality.  As a 
result, information on necessary procedures is often 
difficult to obtain.  Business people often complain of 
excessive red tape; one major foreign investor found that 
starting project construction and a business required 
several hundred permits, many of which the responsible 
government entities were unaware they had to issue.  Other 
investors argue that local governments and municipalities, 
which are seeking new revenue sources, sometimes withhold 
licenses or create regulations, thus hindering the ability 
to do business or making it costlier.  Even though import 
tariffs are substantially lower than previously, import 
duties (the simple average tariff is a 10.1 percent ad 
valorem plus surcharge as of November 2005; the 2004 trade- 
weighted average is 9.4 percent), together with the 19 
percent value added tax on goods, high social security tax 
rates, and certain labor laws increase investment costs 
significantly and hinder the efficient mobilization and 
allocation of investment capital.  Although businesses can 
apply for VAT reimbursement, they often do not; when a 
company applies for reimbursement, the SUNAT conducts a full 
company audit. 
 
Efficient Capital Markets and Portfolio Investment 
--------------------------------------------- ----- 
 
¶40.  Credit is allocated on market terms and the banking 
industry in Peru is generally considered to be competitive 
in offering services to business customers.  Foreign 
investors can obtain credit on the local market and several 
of them have done so in the last few years as terms were 
more competitive than those of the usual international 
centers.  The private sector has access to a variety of 
credit instruments.  In the year through early-December 
2005, firms placed $1.2 billion on the local bond market 
(compared with $1.2 billion in calendar 2004), which has 
been propelled in recent years by demand for investment 
instruments by private pension fund companies.  By October 
2005, pension funds managed a total of $9.37 billion, a 24% 
surge over the October 2004 level ($7.54 billion), thus 
creating a big and growing appetite for financial 
instruments by pension funds.  The 10.5% cap placed by the 
central bank on what the pension funds can invest abroad, 
means that local bond issuers (including the government) and 
loan seekers have a captive capital market for them. 
 
¶41.  All firms listed on the Lima Stock Exchange (Bolsa de 
Valores de Lima) or the Public Registry of Securities must 
be vetted by CONASEV, the National Commission for the 
Supervision of Companies, Securities and Exchanges, which 
maintains the Public Registry of Securities and Stock 
Brokers.  CONASEV is the Peruvian government entity charged 
with the study, promotion, and regulation of the securities 
and commodities markets, the control of market participants, 
the maintenance of a transparent and orderly market, the 
setting of accounting standards and the publication of 
financial information about covered companies.  As part of 
CONASEV's goal to promote market transparency, to prevent 
monopolies, and to prevent fraud, issuers of stock are 
required to inform CONASEV and the relevant stock exchange 
or body in charge of supervising the centralized trading 
mechanism, of events that affect or might affect the stock, 
the company, or any public offerings.  Although trading on 
insider information is technically a crime, no one has been 
punished under the law. 
 
¶42.  Total assets of the commercial banks were $20.7 billion 
at the end of October 2005, 10% above the same period of 
¶2004.  The banking system is considered generally sound, as 
it weathered rather well a severe El Nino and global 
financial turmoil in 1997-98.  Sound supervision combined 
with competition, led to a significant consolidation in the 
sector, which still continues.  Consequently, 14 commercial 
banks remain in the system, of which three banks account for 
over two-thirds of loans and three-fourths of deposits. 
This number will shrink to 13 once the early-December 2005 
purchase of the third largest local bank by a large Canadian 
bank is completed, as it will be merged with a small local 
bank.  Banks have revamped operations, increased 
capitalization, and reduced costs in recent years.  As of 
November 2005, foreigners were majority owners of nine and 
had shares in twelve commercial banks.  Under the SBS's 
conservative criteria, 2.6 percent of total loans were 
assessed as non-performing as of October 2005, down from a 
high of 11 percent in early 2001.  The system also has three 
specialized institutions ("financieras") and about 40 
thriving micro-lenders and savings banks. 
 
¶43.  Larger private firms often use "cross-shareholding" and 
"stable shareholder" arrangements to restrict investment by 
outsiders -- not necessarily foreigners -- in their firms. 
As close family or associates generally control ownership of 
Peruvian corporations, hostile takeovers are practically non- 
existent.  Peruvian law and regulations do not authorize or 
encourage private firms to adopt articles of incorporation 
or association to limit or restrict foreign participation; 
neither are there any private or public sector efforts to 
restrict foreign participation in industry standards-setting 
organizations. 
 
¶44.  Foreign direct investment registered with ProInversion 
as of November 2005 was $12.7 billion, compared with $12.9 
billion a year earlier.  Foreign portfolio investment 
totaled $3.7 billion through September 2005, up from $3.0 
billion a year earlier. 
 
Political Violence 
------------------ 
 
¶45.  Although political violence against investors is not a 
common practice, the mining community witnessed an increase 
in protests, some violent, in 2005.  Violent invasions of 
mining exploration and excavation sites occurred more than a 
dozen times at more than seven sites in 2005, causing 
several foreign companies to significantly delay or to 
abandon plans to establish operations.  Protests against the 
mining industry occurred for various reasons, including 
environmental and social concerns.  Often times, well- 
organized groups, such as the Ronderos, will exaggerate a 
local community's concerns, bringing in protestors from all 
areas to foment violence against the mines.  In at least one 
instance in 2005, the local mayor led a strike against a 
large foreign mining company in an effort to extort 
additional funds from the company.  During 2005, there were 
road blockages and acts of vandalism by groups protesting 
mining operations, coca growers protesting the Government's 
eradication policies, and farmers seeking increased 
government tariff protections and financial support.  There 
were also river blockages by some native communities seeking 
a share of the oil and gas royalties. 
 
¶46.  Political violence remains a concern in the coca- 
growing regions.  The Sendero Luminoso (SL) terrorist 
organization has become increasingly aggressive in these 
areas, carrying out three deadly ambushes of police and 
military personnel in 2005, including a December 5 attack in 
Ayacucho that killed five policemen and wounded a policeman 
and a prosecutor.  There is no illicit foreign investment 
and little government presence in the remote coca-growing 
zones of the Monzon and the Apurimac-Ene River (VRAE) 
valleys.  The U.S. Embassy in Lima restricts visits by 
official personnel to these areas because of the threat of 
violence by narcotics traffickers and remaining columns of 
the SL terrorist group.  Information about insecure areas 
and recommended personal security practices can be found at 
http://www.ds-osac.org/. 
 
¶47.  On January 1-4, 2005, approximately 160 members of the 
ultra-nationalist Ethno-Cacerista Movement seized a police 
station, took hostages, and killed four policemen, before 
surrendering to the authorities.  The brother of the leader 
of this uprising is now one of the leading candidates for 
the Presidency. 
 
Corruption 
---------- 
 
¶48.  It is illegal in Peru for a public official or employee 
to accept any type of outside remuneration for the 
performance of his or her official duties.  Peru has 
ratified both the UN Convention Against Corruption and the 
Organization of American States' Inter-American Convention 
Against Corruption.  Peru is not a member of the 
Organization of Economic Cooperation and Development, and 
has not signed the OECD Convention on Combating Bribery. 
¶49.  Peru is one of four nations worldwide participating as 
a pilot country in the G8 anti-corruption and transparency 
initiative.  The U.S. has worked vigorously to help the 
Peruvian government prepare a detailed action plan, in 
coordination with other G8 partners and NGOs, of activities 
it will pursue under the initiative.  The plan envisions 
activities in six areas:  a) citizen information/internet 
connectivity; b) improving central government fiscal 
transparency; c) development of GOP procurement systems; d) 
improving regional/local government transparency and 
management; e) improvement of transparency of extractive 
industry revenues; and f) development of asset forfeiture 
systems and legislation.  Total project expenditure under 
the initiative is expected to be $40 million in 2005-06, 
with the U.S. already funding some projects. 
 
¶50.  U.S. firms have reported only a small number of 
problems directly resulting from corruption, usually in 
government procurement processes and in the judicial sector, 
but the revelation in late 2000 of a broad and deep 
corruption ring organized by former presidential advisor 
Vladimiro Montesinos has heightened awareness of the 
problem.  Transparency International ranked Peru number 74 
(out of 145 countries) in its 2004 Corruption Perception 
Index.  (In the same study, Chile was ranked 20, Brazil was 
number 59, Colombia was ranked 60 and Argentina was ranked 
108.)  While anti-corruption efforts have been a stated 
priority of the Toledo Government, in practice most 
resources are directed at investigating Fujimori-era 
corruption.  In 2001, President Toledo appointed an anti- 
corruption "czar" to lead government efforts, but this 
official resigned in 2002 and has yet to be replaced. 
Private sector groups have increased efforts to combat 
corruption through an NGO called "ProEtica," which 
represents Transparency International in Peru. 
 
Bilateral Investment Agreements 
------------------------------- 
 
¶51.  Peru has signed bilateral investment agreements with 29 
countries (listed below).  In December 2005, the United 
States and Peru finalized negotiations for a bilateral trade 
agreement, eliminating the need for a bilateral investment 
agreement.  The agreement has yet to be approved and 
ratified by both the U.S. and Peruvian Congresses but is 
scheduled to go into effect on January 1, 2007, to prevent 
any lapse in preferential benefits.  Peru is currently the 
43rd largest export market for U.S. goods, with U.S. exports 
exceeding over $1.7 billion through October 2005.  U.S. 
foreign direct investment in Peru totaled $3.9 billion 
through December 2004.  The U.S.-Peru Trade Promotion 
Agreement (TPA) extends the list of countries in the Western 
Hemisphere with which the United States has completed such 
agreements and would complement the goal of completing Free 
Trade Area of the Americas (FTAA) negotiations. 
 
Peru's Current Bilateral Investment Agreements 
 
Argentina (1994)  El Salvador       Portugal (1994) 
                  (1997) 
Australia (1995)  Finland (1995)    Rumania (1994) 
Bolivia (1993)    France (1993)     Singapore (2003) 
Chile (2000)      Germany (1995)    Spain (1994) 
China (1994)      Italy (1994)      Sweden (1994) 
Colombia (1994)   Korea (1993)      Switzerland 
                                    (1991) 
Cuba (2000)       Malaysia (1995)   Thailand (1991) 
Czech Rep (1994)  Netherlands       United Kingdom 
                  (1994)            (1993) 
Denmark (1994)    Norway (1995)     Venezuela (1996) 
Ecuador (1999)    Paraguay (1994) 
 
OPIC and Other Investment Insurance Programs 
-------------------------------------------- 
 
¶52.  The Overseas Private Investment Corporation (OPIC), an 
independent U.S. Government agency, offers medium- to long- 
term financing and political risk insurance.  OPIC signed 
agreements with Peru in December 1992, and in July 1994, 
OPIC began approving requests for political risk insurance 
(including for inconvertibility of currency).  In 2001, OPIC 
provided project finance loans of $108.4 million. In 2005, 
OPIC provided $800 million worth of insurance coverage for a 
copper mine.  A startup finance company received $27 million 
worth of OPIC insurance coverage.  Because of the free 
convertibility of currency, the U.S. Embassy purchases 
Peruvian currency for expenses on an as-needed basis, at the 
market exchange rate.  The risk of significant depreciation 
of the exchange rate over the next year is negligible.  Peru 
is a member of the Multilateral Investment Guarantee Agency. 
 
Labor 
----- 
 
¶53.  Labor is abundant and trainable, although there are 
shortages of highly skilled workers in some fields and wages 
for professional staff are high (sometimes higher than U.S. 
wages in the mining sector for positions in the managerial 
and consulting fields).  The presence of organized labor in 
the Peruvian economy has declined; it is estimated that less 
than five percent of the labor force is organized. 
Unemployment in Lima officially stood at 7.9 percent in 
October 2005, compared with 9.2 the previous year; surveys 
show that about 55 percent of the economically active 
population was underemployed, mostly working in the informal 
sector for below subsistence wages.  As of August 2005, the 
statutory monthly minimum wage was $141 (460 soles).  Most 
workers in the formal sector receive more than the minimum 
wage, as well as additional non-wage benefits. 
 
¶54.  In 1991-1992, a new labor law and other related 
statutes replaced a greater number of old statutes and 
regulations.  The new laws allow for multiple forms of 
unions across company or occupational lines, thus permitting 
multiple unions in the same company.  Workers in probation 
status or on short-term contracts are not eligible for union 
membership.  Bargaining agreements are considered 
contractual agreements, valid only for the life of the 
contract.  Productivity provisions must be included in any 
collective bargaining agreement.  The number of officialsand the amount of time union officials may devote to union 
work with pay is limited to 30 days per year.  Unless there 
is a pre-existing labor contract covering an occupation or 
industry as a whole, unions must negotiate with each company 
individually.  A labor law passed in July 1995 liberalized 
hiring. 
 
¶55.  Business leaders lauded the above changes, saying they 
led to greater efficiency.  Labor leaders disagreed, arguing 
that the new labor laws eroded labor protections and 
encouraged outsourcing in a way that undercut union 
activity.  With Peru's return to democracy in 2000, Peruvian 
organized labor regained some, but by no means all, of the 
protections enjoyed in the pre-Fujimori era.  A decision by 
the Constitutional Tribunal in 2004, for example, 
legitimized collective industry-wide bargaining in the civil 
construction industry.  Labor leaders saw this as a 
potential precedent to be applied to other activities.  That 
has not yet happened, however. 
 
¶56.  Either unions or management can request binding 
arbitration in contract negotiations.  Strikes can be called 
only after approval by a majority of all workers (union and 
non-union) voting by secret ballot and only in defense of 
labor rights.  Unions in essential public services, as 
determined by the government, must provide a sufficient 
number of workers, as determined by the employer, during a 
strike to maintain operations. 
 
¶57.  The 1993 Constitution provides for a maximum workday of 
eight hours, with 48 hours as the maximum week.  The labor 
code also sets 24 hours rest per week and 30 days paid 
annual vacation for all workers.  Workers readily sacrifice 
these and other benefits in exchange for regular employment. 
Strike activity declined markedly over the past nine years 
and since new labor laws were passed, worker efficiency rose 
substantially.  However, strikes and militant industrial 
action increased again in late 2002 and early 2003, with 
additional strikes in 2004.  The overall number of strikes 
fell in 2005.  Through October 2005, there were 58 strikes 
with a loss of 442,586 man-hours, compared with 91 strikes 
and a loss of 515,480 man-hours in the same period of 2004. 
Congress continues to debate a comprehensive labor law 
reform, but the law remains delayed over the conditions of 
dismissal for employees. 
 
Foreign Trade Zones/Free Ports 
------------------------------ 
 
¶58.  Current Peruvian law governs the two types of free 
trade zones: export, transformation, industry, trade and 
services zones (CETICOS), and a free trade zone (ZOFRATACNA) 
in Tacna.  The rules and tax benefits applying to these 
zones are the same for foreign and national investors. 
 
¶59.  Companies established at the CETICOS and ZOFRATACNA, 
which export no less than 92 percent of their output (more 
than 80 percent of production for the Loreto CETICOS and 
more than 50 percent for ZOFRATACNA), are exempted until 
2012 from all taxes, dues and contributions from the central 
government and municipalities, particularly income, sales 
(IGV), Municipal Promotion (IPM) and excise (ISC) taxes. 
CETICOS exist at Ilo, Matarani and Paita, with one 
authorized but not operating at Loreto.  There is a concern 
that the Peruvian Government does not have the proper WTO 
waivers to validate the CETICOS export requirement.  The 
U.S. automotive industry has expressed a specific concern 
that U.S. brands are unable to compete with used Japanese 
vehicles that enter the Peruvian market duty-free through 
the CETICOS.  Importers locating in ZOFRATACNA pay only 
eight percent customs duties (normal rates are 12 or 20 
percent) on 1,086 items sold to retailers in the city of 
Tacna. 
 
Foreign Direct Investment Statistics 
------------------------------------ 
 
¶60.  The stock of registered foreign direct investment in 
Peru was $12.7 billion by November 2005, according to 
ProInversion, versus $12.9 billion at the end of 2004. 
ProInversion data place Spanish investors as holding the 
largest share (25 percent), with $3.2 billion invested. 
The United Kingdom is the second largest investor, with $2.8 
billion, and the United States is third, with $2.0 billion. 
However, calculated on a replacement-cost basis, the U.S. is 
by far the largest source of foreign direct investment in 
Peru.  According to the U.S. Department of Commerce, U.S. 
registered investment in Peru through December 2004 totaled 
$3.9 billion.  The statistics are skewed because 
ProInversion records investments on the basis of country 
registry, rather than control.  Thus, an investor registered 
in the Bahamas, for example, is recorded as British even if 
the parent is a U.S. company.  As a result, U.S.-controlled 
investment represents a much higher share than the official 
15.7 percent.  By sector, communications received 29 percent 
of foreign direct investment in 2005, followed by finance 
(17.4 percent), manufacturing industry (14.8 percent), 
mining (13.6 percent), and electricity (12.9 percent). 
¶61.  As of November 2005, investors had signed 413 legal 
stability contracts with the Government of Peru.  Legal 
stability contracts commit the government not to apply any 
future changes in the income tax, labor and other laws 
governing a specific investment in exchange for commitments 
to invest a given amount. 
 
STRUBLE