VZCZCXYZ0005
RR RUEHWEB

DE RUEHBU #0119/01 0241349
ZNR UUUUU ZZH
R 241349Z JAN 07
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 7043
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUEHAC/AMEMBASSY ASUNCION 5879
RUEHMN/AMEMBASSY MONTEVIDEO 6099
RUEHSG/AMEMBASSY SANTIAGO 0102
RUEHBR/AMEMBASSY BRASILIA 5721
RUEHSG/AMEMBASSY SANTIAGO 0103
RUEHLP/AMEMBASSY LA PAZ JAN SAO PAULO 3118
RUEHRI/AMCONSUL RIO DE JANEIRO 2118

UNCLAS BUENOS AIRES 000119 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
EB/IFD/OIA FOR WSCHOLZ, MTRACTON 
WHA FOR WHA/BSC AND WHA/EPSC 
E FOR THOMAS PIERCE 
PASS NSC FOR JOSE CARDENAS 
PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE 
PASS USTR FOR EEISSENSTAT, SCRONIN, MSULLIVAN 
TREASURY FOR AFAIBISHENKO, NLEE 
USDOC FOR 4322/ITA/MAC/OLAC/PEACHER 
US SOUTHCOM FOR POLAD 
 
E.O. 12958: N/A 
TAGS: ECON EINV OPIC USTR AR
SUBJECT: ARGENTINA INVESTMENT CLIMATE STATEMENT 2007 
 
¶1. This cable transmits the text of the Argentina 
Investment Climate Statement for 2007 
 
OPENNESS TO FOREIGN INVESTMENT 
 
Argentina remains open to foreign investment.  Four 
consecutive years of real GDP growth over 8 percent have 
attracted considerable U.S. and other international 
investor interest in exploring opportunities in the 
Argentine market.  The government of Argentina, in turn, 
has signaled its desire to see foreign direct investment 
(FDI) expand significantly to enhance the nation?s 
productive capacity and sustain high levels of real GDP 
growth.  However, legal uncertainties concerning creditor 
and contract rights and frequent and unpredictable 
regulatory changes diminish the attractiveness of some 
sectors for foreign investors. 
 
In 1991, the government of Argentina (GoA) pegged the 
Argentine peso to the U.S. dollar at a 1:1 exchange rate 
(?convertibility?) with the aim of breaking the back of 
hyperinflation and adopted far-reaching market-based 
policies, including dismantling a web of protectionist 
trade and business regulations, and reversing a half 
century of statism by implementing an ambitious 
privatization program.  Argentina subsequently received 
significant increases in investment, with FDI inflows among 
the highest in Latin America through most of the 1990s. 
While convertibility defeated inflation, over time its 
permanence, combined with lack of fiscal discipline and 
poor governance, undermined Argentina's export 
competitiveness and created chronic deficits in the current 
account of the balance of payments, which were financed by 
massive borrowing.  The contagion effect of the Asian 
financial crisis of 1998 precipitated an outflow of capital 
that contributed to a 4-year recession that culminated in a 
financial panic in November 2001.  In December 2001, the 
government ended convertibility and defaulted on $82 
billion in debt, the largest sovereign debt default in 
history.  A number of bondholders are actively seeking 
redress. 
 
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.  Argentina owes approximately $7.2 billion to 
official government creditors (including $359 million to 
the U.S. government), of which over $3.5 billion consists 
of arrears and past due interest.  The GoA has indicated 
interest in normalizing its relationship with official 
government creditors.  As of this writing, however, the GoA 
has declined to deal with private bondholders who chose not 
to participate in the 2005 restructuring. 
 
The surge in Argentina?s real GDP growth over the past four 
years was largely due to a boost in domestic aggregate 
demand stimulated by the government?s fiscal, monetary and 
income distribution policies.  Argentina posted real GDP 
growth of 8.8 percent in 2003, 9.0 percent in 2004, 9.2 
percent in 2005, and an estimated 8.4 percent in 2006. 
This impressive economic recovery, which has led to 
improvements in key socio-economic indicators, can be 
attributed to a number of factors.  First, following 
reforms in the 1990s, Argentina?s economy was fundamentally 
sound except for the high level of indebtedness.  Second, 
the move away from convertibility combined with favorable 
international commodity price, interest rate and global 
growth trends were catalytic factors in supporting 
 
 
Argentina's growth.  Third, the government has worked hard 
to maintain a primary fiscal surplus and continues to 
accumulate reserves.  Argentina should continue to perform 
well in 2007 with GDP growth projected in the 7 percent 
range.  Nevertheless, slowness in addressing the post- 
crisis re-negotiation of public service contracts, capacity 
constraints, potential energy shortages in the face of high 
growth and distorted energy prices, inflation and the 
government's policies to contain it (including pressure on 
the private sector to maintain price controls) pose 
potential obstacles to sustaining Argentina?s economic 
recovery. 
 
Industrial activity has performed well, growing from 16 
percent of GDP in 2001 to 23 percent in 2005.  Illustrative 
of this industrial expansion, in 2006 the domestic car 
industry had its best year since 1998, with production up 
35 percent from 2005 to an estimated 432,100 units and 
automotive exports, which comprise about 55 percent of 
total production, up 30 percent from 2005 to an estimated 
236,800 units.  Meanwhile, tourism continued its strong 
growth, with Argentina receiving an estimated 4.1 million 
foreign tourists in 2006, also a record. 
 
Argentina?s economic expansion continues to create jobs, 
and unemployment continues to decline, down from 21.5 
percent during the 2002 economic crisis to 10.2 percent 
during the third quarter of 2006.  Investment in real terms 
is forecast by the Central Bank to have jumped 18.3 percent 
in 2006.  The recovery?s strong impact on government 
revenue collections combined with a boost in the 
consolidated tax burden from 21 percent of GDP in 2000 to 
31 percent in 2006 allowed the consolidated primary fiscal 
surplus to reach 3.6 percent of GDP in 2006, and the 
surplus after interest payments was 2.0 percent of GDP. 
However, recent substantial increases in federal and 
provincial public spending may reduce or eliminate the 
consolidated fiscal surplus in coming years. 
 
Meanwhile, the move from convertibility to a managed float 
exchange rate regime and high global commodity prices have 
lifted exports to record levels and hefty surpluses in 
Argentina?s trade and current account balance of payments. 
These balance of payments surpluses have allowed an 
accumulation of foreign exchange reserves which reached USD 
32 billion at the end of 2006, almost 12 months of current 
imports.  In early 2006, the GoA used reserves to pay down 
its $9.5 billion of debt with the IMF. 
 
Argentina?s Central Bank has managed monetary and currency 
policy in support of the economic expansion and maintaining 
low real interest rates.  Such policies have also 
contributed to substantial inflationary pressures.  To help 
control inflation, the government has frozen key public 
utility tariff rates since 2002 and, since 2005, has 
negotiated price stabilization agreements on a sizeable 
basket of essential consumer goods.  As a result, reported 
consumer inflation dropped from 12.3 percent in 2005 to an 
estimated 9.8 percent in 2006.  However, real core 
inflation remains several points higher than indexed 
inflation. 
 
Private sector bank balance sheets, which deteriorated 
significantly during the economic crisis, are recovering, 
with improving levels of liquidity, net exposure to the 
public sector significantly reduced, and credit ? primarily 
to the private sector -- increasing at a faster pace than 
nominal GDP growth.  Most private banks have returned to 
solvency, both in terms of profitability and quality of 
 
 
portfolio.  The ratio of non-performing loans has fallen to 
a historic low of approximately 5 percent, and profits for 
the overall banking system are at the highest levels in 
over a decade.  However, new lending is mostly short-term, 
as access to long-term financing is limited and borrowers 
are reluctant to borrow long-term at variable rates. 
Uncertainty about the levels of long-term inflation will 
continue to complicate GoA and private sector efforts to 
develop a long-term fixed interest rate market, without 
which it will be difficult to deepen Argentina?s mortgage 
market or engage in large-scale project finance. 
 
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 
exports, assets, financial transactions, and property and 
payroll (social security and related benefits).  In June 
2003, Argentina announced that it would review more closely 
the tax declarations of foreign corporations operating in 
Argentina.  The professed aim of this measure is to crack 
down on the use of offshore shell corporations to shelter 
profits and assets from taxation. 
 
The GoA has established a number of investment promotion 
programs.  Those programs allow for VAT refunds and 
accelerated depreciation of capital goods for investors 
(although numerous investors have reported difficulties and 
delays in obtaining expected VAT refunds); offer tariff 
incentives for local production of capital goods; and 
include sectoral programs, free trade zones, and a special 
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/. 
 
According to the World Bank?s latest ?Doing Business? 
survey, Argentina in 2006 ranked 101 out of 175 nations 
 
 
surveyed in overall ?ease of doing business,? down from 93 
in 2005.  The survey considered issues such as: starting a 
business; dealing with licenses; employing workers; 
registering property; getting credit; protecting investors; 
paying taxes; trading across borders; enforcing contracts; 
and closing a business. 
 
CONVERSION AND TRANSFER POLICIES 
 
Until the end of 2001, Argentine law offered a number of 
protections for free capital and currency transfers.  Law 
21382, Article 5 (as implemented by Decree 1853/1993), 
allows foreign investors to repatriate capital and remit 
earnings abroad at any time.  Article V of the United 
States-Argentina BIT also provides for free, prompt 
transfers related to investments. In the wake of the 2001- 
2002 crisis, however, the GoA instituted and subsequently 
modified an array of emergency transfer and currency 
conversion restrictions. The number of new regulations and 
the frequency of policy changes have generated considerable 
uncertainty for investors.  Fourteen U.S. investors have 
submitted claims against the GoA to binding investor-state 
arbitration under the BIT, making the case that measures 
imposed by Argentina during the financial crisis that began 
in 2001 breached BIT obligations. 
 
The GoA Ministry of Economy and the Central Bank have 
issued various new or revised foreign exchange transaction 
regulations in an attempt to normalize the foreign exchange 
market and to limit the peso's appreciation.  In nominal 
terms, the Argentine peso depreciated 70% in 2002, 
following the financial crisis that began in December 2001. 
The peso subsequently appreciated 15% percent against the 
USD in 2003, and slightly depreciated by 1% in 2004, 2% in 
2005, and 1% in 2006. 
 
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.  In June 2005, the government 
further tightened capital controls through Decree 616/2005. 
The decree increased the minimum holding period for capital 
inflows from 180 to 365 days and established that some 
capital inflows are subject to a 30 percent unremunerated 
reserve requirement to be deposited in a local bank for 365 
days.  This deposit must be denominated in USD and the 
proceeds cannot be used as collateral.  The remaining 70 
percent is free to be invested, but is subject to the 365- 
day minimum holding period. Capital inflows related to 
trade transactions, foreign direct investment or to primary 
public offerings of stock or bonds (from both the private 
and public sector) as well as inflows from International 
Financial Institutions are exempt from controls.  Decree 
616 differentiated from previous regulation as it attempted 
to discourage capital inflows by increasing the cost of 
bringing capital into the country. 
 
A resident individual or company is allowed to purchase up 
to USD 2 million per month of foreign currency without 
Central Bank authorization. Any excess is subject to the 
restrictions (e.g. 30 percent reserve requirement and 365- 
day minimum investment period).  In December 2006, the 
Central Bank established that capital inflows and outflows 
must be registered under a person?s or business? name, 
whereas in the past transactions could be registered 
generically under the local brokerage/exchange house. 
There are special rules regulating the purchase of foreign 
currency to settle financial debt, and for the private 
 
 
issuance of bonds denominated in foreign currency. 
 
Decree 260/2002 lifted official conversion rates that had 
been established in early 2002. With this decree, the 
market determines the rate of exchange, with Central Bank 
intervention, and subject to rules established by the 
Central Bank. The Central Bank intervenes frequently in the 
foreign exchange market, with the objective of maintaining 
a competitive peso. 
 
EXPROPRIATION AND COMPENSATION 
 
Article 4 of the United States-Argentina BIT states that 
investments shall not be expropriated or nationalized 
except for public purpose upon payment of prompt fair- 
market value compensation.  However, some U.S. investors 
claim the January 2002 pesification of dollar-denominated 
contracts amounts to an effective expropriation of their 
investments. A number of these investors have filed 
international arbitration claims against the government of 
Argentina. 
 
DISPUTE SETTLEMENT 
 
The GoA accepts the principle of international arbitration. 
The United States-Argentina BIT provides for binding 
international arbitration of investment disputes that 
cannot be settled through amicable consultation and 
negotiation between the parties. The government of 
Argentina is a party to the International Center for the 
Settlement of Investment Disputes (ICSID), The United 
Nations Commission on International Trade Law (UNCITRAL), 
and the World Bank's Multilateral Investment Guarantee 
Agency (MIGA). Companies that seek recourse through 
Argentine courts, however, may not also pursue recourse 
through international arbitration. 
 
In April 2003, the GoA issued Decree 926/2003, which 
created two new agencies to carry out 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 
Contracts" (UNIREN), which was created to serve essentially 
the same function, but which is presided over jointly by 
the Ministers of Planning and Economy. The other entity 
created by Decree 926/2003 is the "Amicable Negotiations 
Proceedings Body," which works under the Federal 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 33 pending cases involving 
Argentina before the ICSID tribunal as of mid-December 
2006,  32 percent of total pending ICSID cases with claims 
amounting to USD 13.3 billion, 6.5 percent of projected 
2006 GDP.  Over the past two years several ICSID claimants 
have suspended active claims to facilitate further 
negotiation with the government. 
 
In a December 2006 decision on the 2002 pesification 
decree, the Supreme Court ordered banks to reimburse 
depositors in local currency the total value of deposits 
originally held in U.S. dollars that had earlier been 
frozen.  The decision also upheld the legality of this 
pesification decree, which froze bank deposits and forcibly 
converted dollar savings into devalued pesos.  The ruling 
ordered banks to compensate depositors at 3.08 pesos to the 
dollar -- equal to the pesified deposits they would now 
hold under the original decree, and applying a currency 
conversion rate of 1.40 pesos per dollar, adjusts for 
inflation and adds a 4 percent annual interest rate to be 
applied retroactively since the pesification began. 
 
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 including 
minimum-content and other requirements. Special regimes 
also apply to mining, oil and gas, and other natural 
resource sectors. The special regimes allow producers to 
keep all (as in the case of mining) or 70 percent of their 
foreign exchange revenues off-shore (as in the case of oil 
and gas, fisheries and forestry). 
 
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 goods" 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. 
 
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, in February 2002, the government 
of Argentina established an extended moratorium prohibiting 
financial institutions from foreclosing on delinquent 
mortgages on primary residences.  In November 2006, the 
government of Argentina established a law that allowed 
owners of primary homes of limited value to pay down their 
dollar-based mortgages, at a below-market exchange rate of 
1.8 pesos to the dollar. 
 
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 an ongoing problem in Argentina's 
intellectual property rights regime, and extension of 
adequate patent protection to pharmaceuticals has been a 
highly contentious bilateral issue. In 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. 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). 
However, the government?s dedication of additional 
resources to patent adjudication over the past three years 
has substantially increased the number of patents issued, 
including in the pharmaceutical area.  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 undercut their 
ability to protect patented products through judicial 
injunctions 
 
Copyrights, Trademarks, Trade Secrets, and Semiconductor 
Chip Layout Design: Despite the fact that Argentina?s 
copyright law dates to 1930, it provides a generally good 
legal framework to protect intellectual property such as 
books, films, music, and software. However, the economic 
crisis of 2002 led to an increase in the use of unlicensed 
software and optical media.  Piracy rates of CDs, DVDs and 
software are all estimated at over 50 percent.  Enforcement 
continues to be sporadic and pirated products are widely 
available in the market.  That said, Argentine authorities 
began in late 2004 to show signs of a more proactive 
posture regarding product piracy.  Specifically, the 
government of Argentina passed laws designed to allow 
 
 
authorities to mount undercover operations for the first 
time; to electronically flag suspect shipments; to 
facilitate the seizure and detention of suspect 
merchandise; and to more frequently rotate customs 
personnel, among other provisions. A January, 2005 law 
which allowed Customs officials to seize shipments which 
violate IP rights ? and detain them based on the 
presumption of IP violations, pending a formal decision ? 
was implemented in October, 2006. The government has also 
improved the process for trademark registration, decreasing 
the time needed and increasing the rate at which trademarks 
are registered.  Argentina has no specific law on trade 
secrets, although penalties for unauthorized revelation of 
 
SIPDIS 
secrets are applied to a limited degree under commercial 
 
SIPDIS 
law. Argentina has signed the WIPO Treaty on Integrated 
Circuits, but has no law dealing specifically with the 
protection of layout designs and semiconductors. 
 
TRANSPARENCY OF THE REGULATORY REGIME 
 
During the 1990s, the GoA eliminated virtually all 
restrictions on domestic and foreign trade of goods and 
services, as well as on financial markets. These policies 
increased competition in many industries and sectors. 
Argentine authorities, including the Ministry of Economy 
and a number of quasi-independent regulatory entities, have 
also 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 debtors? 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 GoA announced in May 2002 that an emergency 
decree passed in late 2001 had voided the presidential 
decree that authorized oil and gas companies to keep 70 
percent of their foreign exchange revenues offshore. This 
decree formed the financial basis for most foreign 
investment in the Argentine oil sector.  The GoA?s 
discovery that the decree had been voided inadvertently 
months before came at a time when 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 GoA?s actions since 2003 have not calmed investor 
concerns about the regulatory environment. The GoA 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 GoA took measures to avoid energy 
shortages that arose from the increase in demand for 
natural gas and electricity in 2004, including ordering 
reductions in natural gas exports to Chile and electricity 
exports to Uruguay; importing natural gas from Bolivia and 
electricity from Brazil; raising tariffs for industrial 
 
 
users; providing incentives to small users to save energy; 
and intervening in the wholesale markets for natural gas 
and electricity.  The GoA has also encouraged companies to 
invest in the expansion of natural gas pipelines, and has 
encouraged power companies to invest compensation owed them 
by the GoA in new power generation plants.  There is 
concern that the above mentioned GoA actions in the energy 
sector, coupled with the GOA's efforts to control retail 
prices of fuels, have created disincentives for companies 
to invest in energy exploration and infrastructure. 
Inadequate investment in those areas could, in turn, result 
in energy supplies not keeping pace with demand generated 
by Argentina's rapid economic growth. 
 
In 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 three major taxes: an 
income tax, export taxes imposed in 2002, a financial 
transactions tax and a 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 years.  Export taxes are 
tariffs imposed on the export of all goods, with rates from 
5 percent to 45 percent.  The financial transactions tax 
imposes a 0.6 percent on all checking account payments 
within the national banking system.  The VAT is set at 21 
percent for most products. The VAT is 10.5 percent for 
interest and commissions on debts taken by public 
transportation companies, fruits, vegetables, honey, 
newspapers and magazines, and some capital goods.  The VAT 
is 27 percent for natural gas, electricity, water and 
sewage services.  Exporters should receive VAT rebates, but 
many companies have experienced extensive delays in their 
receipt of VAT rebates. 
 
At the provincial level, the system of provincial sales 
taxes has encouraged vertical integration of firms. 
Investors also have expressed increasing concern over the 
incidence of municipal "supply taxes". The Argentine 
constitution gives municipalities the right to set fees for 
the services that they provide, including supply 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. 
 
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, securities firms and investment funds are well 
represented in Argentina and are 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 2001-2002 economic and 
financial crisis.  Following the government?s 2005 debt 
restructuring private pension funds have again become 
significant players in domestic capital markets.  In July 
2003, the government began requiring foreign banks to 
disclose to the public the nature and extent to which their 
foreign parent banks guarantee their branches or 
subsidiaries in Argentina. 
 
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. 
 
In protest against the construction of a $1.2 billion pulp 
mill on the Uruguayan side of a river that defines the 
Argentine/Uruguay border, Argentine citizens have blocked a 
bridge that connects the two nations for much of 2006.  The 
pulp mill project is being financed and insured by World 
Bank agencies and has met all relevant World Bank 
environmental safeguards.  The Mercosur trade block?s 
arbitral tribunal considered the case in 2006 and found the 
block illegal and a violation of the right of free transit 
of goods and services in the region.  Nonetheless, the 
Government of Argentina has refused to intervene, a 
decision that has led to a deterioration of relations 
between the two countries.  Argentina asked the 
International Court of Justice to issue an injunction 
halting the plant?s construction, as well as its opinion on 
whether construction of the plant violated a 1975 
Argentine-Uruguayan treaty dealing with its shared river. 
In mid-2006, the International Court refused to impose such 
an injunction and is expected to render a final decision on 
the case in 2007. 
 
CORRUPTION 
 
Government corruption and private sector business fraud are 
the subjects of frequent complaints from U.S. investors. 
U.S. businesses have identified corruption in Argentina as 
a significant problem for trade and investment, 
particularly in procurement, regulatory systems, tax 
collection, and health care administration.  In the latest 
 
 
annual Transparency International survey of Corruption 
Perceptions Index that ranks countries by their perceived 
levels of corruption, Argentina ranked 93rd out of 163 
countries, below the average among Latin American 
countries, and far behind neighbors Chile and Uruguay. 
Such surveys have contributed to more open debate in 
Argentina about corruption and fraud.  Some foreign firms 
complain that their adherence to the letter of the tax and 
regulatory codes places them at a competitive disadvantage 
vis their domestic competitors.  There are indications that 
the GoA is trying to change the culture of tax evasion by 
stepping-up enforcement efforts and encouraging the use of 
credit card purchases while at the same time using the 
media to increase public awareness of tax obligations and 
to shame evaders.  While Argentina?s growing economy is 
primarily responsible for the government of Argentina?s 
solid fiscal performance, anti-evasion efforts were a 
factor in the federal government?s record tax collections 
of about 150 billion pesos in 2006, up from around 118 
billion in 2005 and 98 billion in 2004. 
 
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.  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. 
 
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. 
 
At present, the GoA has signed and ratified bilateral 
treaties for the protection and promotion of investment 
with all of its major trade and investment partners. More 
information regarding Argentina's bilateral tax and 
investment treaties is available at www.infoleg.gov.ar. 
 
Argentina has valid double taxation treaties with the 
following countries: Australia, United Kingdom, Denmark, 
Germany, Belgium, Austria, France, Italy, Sweden, 
Switzerland, Spain, Canada, Chile, Bolivia, Brazil, 
Finland, Norway, and the Netherlands. In addition thereto, 
a number of treaties concerning the exemption of income 
from international transport are in force. 
 
OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS 
 
The government of Argentina signed a comprehensive 
agreement with the Overseas Private Investment Corporation 
(OPIC) in 1989. The agreement allows OPIC to insure U.S. 
investments against risks resulting from expropriation, 
inconvertibility, war or other conflicts affecting public 
order.  OPIC programs are currently used in Argentina. 
Argentina is also a member of the World Bank's Multilateral 
 
 
Investment Guarantee Agency (MIGA). 
 
LABOR 
 
Argentine workers are among the more highly educated in 
Latin America.  Argentine workers were relatively well paid 
by international standards prior to the peso devaluation in 
January 2002.  While high inflation following the 2002 
devaluation significantly eroded the purchasing power of 
wages, sustained government-promoted increases in public 
and private sector nominal wage levels from 2003 have 
reversed this trend.  Wages in dollar terms remain 
competitive, even taking into account Argentina's 
relatively high social security charges and other taxes. 
As of the third quarter of 2006, the official unemployment 
rate was 10.2 percent, down form 21.5 percent in 2002, but 
this number excludes recipients of government assistance to 
unemployed heads of households.  If those recipients were 
included, unemployment would be approximately 12.1 percent. 
 
Organized labor continues to play a strong role in 
Argentina.  Sector-specific negotiations between unions and 
industry, although largely market driven, have often been 
influenced by government suasion on behalf of unions.  In 
the 2002-2004 period, a number of general wage increases 
were mandated by presidential decree. 
 
With the unemployment rate projected to fall below 10 
percent in 2007, numerous employers have commented on an 
increasing shortage of skilled labor.   The GoA passed a 
modest labor reform law in 2000 to address rigidities in 
the labor market (i.e., 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.  According 
to the World Bank?s ?Doing Business? survey mentioned 
above, the cost of terminating an employee in Argentina 
averaged 138 weeks of wages, almost double the Latin 
American average of 59 and more than four times the OECD 
average of 31. 
 
FOREIGN TRADE ZONES/FREE PORTS 
 
Argentina has two types of tax-exempt trading areas: 
Foreign Trade Zones (FTZs), which are found throughout the 
country; and the more comprehensive Special Customs Area 
(SCA), which  covers all of Tierra del Fuego Province and 
whose benefits apply only to already established firms. 
 
Law 24331 of 1994 establishes the FTZ regime for Argentina. 
Argentine law defines an FTZ as a territory outside the 
?general customs area? (GCA, i.e., the rest of Argentina) 
where neither the inflows nor outflows of exported final 
merchandise are subject to tariffs, non-tariff barriers, or 
other taxes on goods. Goods produced within a FTZ generally 
cannot be shipped to the GCA, unless they are capital goods 
not produced in the rest of the country. The labor, 
sanitary, ecological, safety, criminal, and financial 
regulations within FTZs are the same as those that prevail 
in the GCA. Foreign firms get national treatment in FTZs. 
 
 
 
Under the current law, the Executive Power may create one 
FTZ per province, with certain exceptions. More than one 
FTZ per province may be allowed in sparsely populated 
border regions (although this provision has not been fully 
utilized). Thus far, the National Executive Power has 
permitted FTZs in most of the 24 Argentine provinces. The 
most active FTZ is in La Plata, the capital of Buenos Aires 
Province. 
 
Merchandise shipped from the GCA to a FTZ may receive 
export incentive benefits, if applicable, only after the 
goods are exported from the FTZ to a third country 
destination. Merchandise shipped from the GCA to a FTZ and 
later exported to another country is not exempt from export 
taxes. Any value added in FTZs and re-exports from FTZ is 
exempt from export taxes. 
 
Law 19640, passed in 1972, codifies the Special Customs 
Area (SCA) rules for Argentina. Unlike FTZ manufactured 
goods, products manufactured in an SCA may enter the GCA 
free from taxes or tariffs. In addition, the government may 
enact special regulations that exempt products shipped 
through an SCA (but not manufactured therein) from all 
forms of taxation except excise taxes. The SCA program 
provides benefits for established companies that meet 
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.  In late 2006, Economic Ministry 
Resolution 776 abolished export tax exemption enjoyed by 
oil companies operating in Tierra del Fuego Province. 
 
FOREIGN DIRECT INVESTMENT STATISTICS 
 
As of the end of 2005 (the latest date available), the 
total stock FDI in Argentina was estimated at $55 billion, 
with Spain, the United States and France the top three 
investors.  In 2005, the total FDI inflows were estimated 
at $4.6 billion.  The stock of U.S. FDI in Argentina in 
2005 was estimated at $13.2 billion.  U.S. investment is 
concentrated in financial services, agribusiness, energy, 
petrochemicals, food processing, household products, and 
motor vehicle manufacturing.  Many U.S. firms substantially 
wrote down the value of their Argentine investments in 
response to the devaluation and pesification of previously 
dollar-denominated contracts. 
 
Other important sources of investment capital include 
Canada, Mexico, U.K., Italy, Chile, the Netherlands and 
Germany.  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. 
 
In 2005, Argentina received 1.4 percent of foreign direct 
investment (FDI) inflows to developing countries, and 5.9 
percent of FDI inflows to Latin America.  Both of these 
shares are well below Argentina's average FDI share from 
the pre-crisis 1992-2000 period. 
 
Argentine firms increasingly invested abroad during the 
1990s (particularly in Brazil, Paraguay and Uruguay), 
 
 
although the country has remained a net recipient of 
foreign direct investment. 
 
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. 
WAYNE