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DE RUEHBU #0058/01 0161135
ZNR UUUUU ZZH
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FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 0052
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHINGTON DC
RUCPCIM/CIM NTDB WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUEHAC/AMEMBASSY ASUNCION 6758
RUEHMN/AMEMBASSY MONTEVIDEO 6958
RUEHSG/AMEMBASSY SANTIAGO 0980
RUEHBR/AMEMBASSY BRASILIA 6641
RUEHLP/AMEMBASSY LA PAZ JAN CARACAS 1660
RUEHMD/AMEMBASSY MADRID 1962
RUEHFR/AMEMBASSY PARIS 1348

UNCLAS BUENOS AIRES 000058 
 
SIPDIS 
 
SIPDIS 
 
DEPARTMENT FOR EB/IFD/OIA 

PASS NSC FOR MICHAEL SMART 

PASS FED BOARD OF GOVERNORS FOR ROBITAILLE 

PASS USTR FOR DUCKWORTH AND SULLIVAN 

TREASURY FOR MATTHEW MALLOY 

USDOC FOR 4322/ITA/MAC/OLAC/PEACHER 

US SOUTHCOM FOR POLAD 

 

E.O. 12958: N/A 

TAGS: ECON EINV ETRD OPIC KTDB USTR PGOV AR

SUBJECT: Argentina: 2008 Investment Climate Statement 

 

Ref: 07 State 158802 

 

------------------------------ 

Openness to Foreign Investment 

------------------------------ 

 

¶1. Argentina remains open to foreign investment.  Five 

consecutive years of real GDP growth over 8 percent have 

attracted considerable U.S. and other international 

investor interest in exploring opportunities in the 

Argentine market.  The government of Argentina, in turn, 

has signaled its desire to see foreign direct investment 

(FDI) expand significantly to enhance the nation's 

productive capacity and sustain high levels of real GDP 

growth.  However, legal uncertainties concerning creditor 

and contract rights and frequent and unpredictable 

regulatory changes diminish the attractiveness of some 

sectors for foreign investors. 

 

In 1991, the government of Argentina (GOA) pegged the 

Argentine peso to the U.S. dollar at a 1:1 exchange rate 

(""convertibility"") with the aim of breaking the back of 

hyperinflation and adopted far-reaching market-based 

policies, including dismantling a web of protectionist 

trade and business regulations, and reversing a half 

century of statism by implementing an ambitious 

privatization program.  Argentina subsequently received 

significant increases in investment, with FDI inflows among 

the highest in Latin America through most of the 1990s. 

While convertibility defeated inflation, over time the 

rigidity that it imposed on exchange rate policy, combined 

with lack of fiscal discipline and poor governance, 

undermined Argentina's export competitiveness and created 

chronic deficits in the current account of the balance of 

payments, which were financed by massive borrowing.  The 

contagion effect of the Asian financial crisis of 1998 

precipitated an outflow of capital that contributed to a 

four-year recession that culminated in a financial panic in 

November 2001. 

 

In January 2002, the government ended convertibility and 

defaulted on roughly $82 billion in privately held debt and 

over $6 billion in debt to official government creditors 

(including approximately $360 million owed to the U.S. 

government).  In February 2005, private investors holding 

76 percent of Argentina's defaulted debt accepted an 

Argentine government offer of approximately 30 cents on the 

dollar of old debt.  Some remaining ""holdout"" private 

bondholders are still actively seeking redress but, as of 

this writing, the GOA has declined to deal with private 

bondholders who chose not to participate in the 2005 

restructuring.  Of the over $6 billion owed to official 

government creditors, over $4 billion consists of arrears 

and past-due interest.  The GOA has indicated interest in 

normalizing its relationship with official government 

creditors. 

 

Argentina posted real GDP growth of 8.8 percent in 2003, 

9.0 percent in 2004, 9.2 percent in 2005, 8.4 percent in 

2006, and an estimated 8.5 percent in 2007.  This 

impressive economic recovery, which has also led to 

improvements in key socio-economic indicators, can be 

attributed to a number of factors.  These include 

Argentina's post-crisis move to a flexible exchange rate 

regime, sustained global and regional growth, a boost in 

domestic aggregate demand via monetary, fiscal and income 

distribution policies, favorable international commodity 

prices, and interest rate trends. 

 

New taxes, better collecting efforts, and the recovery's 

strong impact on revenues have allowed the government to 

record primary fiscal surpluses in recent years.  The 2006 

federal primary surplus amounted to 3.5 percent of GDP, and 

is estimated at 3.3 - 3.48 percent of GDP in 2007, although 

this declined to roughly 2.3 - 2.5 percent of GDP when 

excluding a one-time adjustment due to changes in 

Argentina's pension regime).  The government projects a 

primary fiscal surplus of about 3.5 percent in 2008. 

 

Argentina should continue to perform well, with the Central 

Bank of Argentina's consensus survey forecasting 6.6 

percent real GDP growth for 2008.  A range of economic 

experts have identified challenges to sustaining high 

levels of economic growth in the future, including: 

capacity constraints; the need for substantial new 

investment in primary infrastructure; potential energy 

shortages in the face of high growth and domestic energy 

prices maintained by the government below international 

market levels; increasing scarcity of highly skilled labor; 

inflation (8.5 percent in 2007 according to official 

statistics, but estimated by independent analysts to be 

significantly higher) and the government's heterodox 

policies to contain it, including pressure on the private 

sector to limit price increases via ""price stabilization"" 

agreements; and delays addressing the post-crisis 

renegotiation of public service contracts. 

 

The industrial sector has performed well, growing from 16 

percent of GDP in 2001 to 22.3 percent in 2006. 

Illustrative of this industrial expansion, the domestic car 

industry had its best year in history in 2007, with 

production reaching 544,647 units, up 26% from 2006. 

Automotive exports reached 316,410 units in 2007, also an 

all-time record, and comprising about 58% of total 

production.  In 2007, the automotive industry accounted for 

almost 20% of Argentina's manufacturing output and 36% of 

all manufacturing exports, measured by value. 

 

Argentina's economic expansion continues to create jobs, 

and unemployment continues to decline, down from a 21.5 

percent peak in 2002 to 8.8 percent during the third 

quarter of 2007 according to official government 

statistics.  Investment in real terms, according to 

consensus forecasts published by the Central Bank, was 

estimated to have increased 13.8 percent in 2007. 

Meanwhile, the move from convertibility to a managed float 

exchange rate regime and high global commodity prices have 

lifted the value of exports to record levels.  A 

substantial foreign exchange reserve cushion ($46 billion 

as of December 2007) has also helped insulate the economy 

from external shocks.  In January 2006, the GOA used 

reserves to pay down its $9.5 billion debt to the IMF. 

 

Argentina's Central Bank has managed monetary and currency 

policy in support of the economic expansion, maintaining an 

undervalued or ""competitive"" exchange rate and negative 

real interest rates.  Such policies have contributed to 

substantial inflationary pressures.  To help control 

inflation, the government largely froze key public utility 

tariff rates since 2002 and, since 2005, has negotiated 

price stabilization agreements on a sizeable basket of 

essential consumer goods. 

 

Private sector bank balance sheets, which deteriorated 

significantly during the economic crisis, are recovering, 

with improving levels of liquidity, net exposure to the 

public sector significantly reduced, and credit - primarily 

to the private sector - increasing at a faster pace than 

nominal GDP growth.  According to private rating agencies, 

most private banks (which hold approximately 55 percent of 

total financial system deposits and 67percent of loans) 

have returned to solvency.  The ratio of private bank non- 

performing loans has fallen to an historic low of 

approximately 2.5 percent, and profits for the overall 

banking system are among the highest levels achieved in 

over a decade. According to central bank regulatory 

authorities, public banks, which hold the remaining assets, 

are also solvent and liquid.  However, system-wide, new 

lending is mostly short-term, as access to long-term 

financing is limited and borrowers are reluctant to borrow 

long-term at variable rates.  Uncertainty about the levels 

of long-term inflation will continue to complicate GOA and 

private sector efforts to develop a long-term fixed 

interest rate market, without which it will be difficult to 

deepen Argentina's financial markets or support large-scale 

project finance.  Government officials have acknowledged 

the lack of medium- and long-term credit facilities needed 

to support the expansion of domestic productive capacity 

and, according to media reports, are considering whether 

and how to structure a state-supported long-term financing 

vehicle. 

 

Decree 1853/1993 governs foreign investment in Argentina. 

According to this decree, foreign companies may invest in 

Argentina without registration or prior government 

approval, and on the same terms as investors domiciled in 

Argentina.  Investors are free to enter Argentina through 

merger, acquisition, greenfield investment, or joint 

venture.  Foreign firms may also participate in publicly 

financed research and development programs on a national 

treatment basis.  In June 2003, Argentina enacted 

legislation limiting foreign ownership of ""cultural goods,"" 

which includes media and Internet companies, to 30 percent. 

An exception to the 30 percent limit is made for investors 

from those countries whose foreign investment regimes allow 

more than 30 percent foreign ownership of cultural goods. 

This law also exempts media companies from ""cramdown"" (or a 

bankruptcy court's enforcement of a reorganization plan 

despite the objections of some creditors) rules in 

restructuring and bankruptcy. 

 

A Bilateral Investment Treaty (BIT) between Argentina and 

the United States entered into force in October 1994.  The 

BIT provides protections against capital movement 

restrictions, expropriations, and performance requirements; 

it also establishes effective means for the settlement of 

investment disputes.  The BIT lists a few sectors in which 

Argentina maintains exceptions to national treatment for 

U.S. investors: real estate in border areas, air 

transportation, shipbuilding, nuclear energy, uranium 

mining, and fishing. U.S. investors must obtain permission 

from the Ministry of Defense's Superintendency for 

Frontiers to invest in non-mining activities in border 

areas. 

 

Foreign and Argentine firms face the same tax liabilities. 

In general, taxes are assessed on consumption, imports and 

exports, assets, financial transactions, and property and 

payroll (social security and related benefits).  In June 

2003, Argentina announced that it would review more closely 

the tax declarations of foreign corporations operating in 

Argentina. The professed aim of this measure is to crack 

down on the use of offshore shell corporations to shelter 

profits and assets from taxation. 

 

The GOA has established a number of investment promotion 

programs.  Those programs allow for VAT refunds and 

accelerated depreciation of capital goods for investors 

(although numerous investors have reported difficulties and 

delays in obtaining expected VAT refunds); offer tariff 

incentives for local production of capital goods; and 

include sectoral programs, free trade zones, and a Special 

Customs Area (SCA) in Tierra del Fuego, among other 

benefits.  A complete description of the scope and scale of 

Argentina's investment promotion programs and regimes can 

be found at http://www.industria.gov.ar and 

http://www.prosperar.gov.ar.  Information about programs 

that specifically apply to small and medium businesses may 

be found at http://www.sepyme.gov.ar. 

 

According to the World Bank's latest ""Doing Business"" 

survey, Argentina in 2007 ranked 109 out of 178 nations and 

territories surveyed in overall ""ease of doing business,"" 

down from 101 in 2006.  The survey considered issues such 

as: starting a business; dealing with licenses; employing 

workers; registering property; getting credit; protecting 

investors; paying taxes; trading across borders; enforcing 

contracts; and closing a business. 

 

-------------------------------- 

Conversion and Transfer Policies 

-------------------------------- 

 

¶2. Until the end of 2001, Argentine law offered a number of 

protections for free capital and currency transfers.  Law 

21382, Article 5 (as implemented by Decree 1853/1993) 

allows foreign investors to repatriate capital and remit 

earnings abroad at any time. Article V of the United 

States-Argentina BIT also provides for free, prompt 

transfers related to investments. In the wake of the 2001- 

2002 crisis, however, the GOA instituted and subsequently 

modified an array of emergency transfer and currency 

conversion restrictions.  The number of new regulations and 

policy changes has generated considerable uncertainty for 

investors. 

 

The Argentine Ministry of Economy and the Central Bank have 

issued various new or revised foreign exchange transaction 

regulations in an attempt to normalize the foreign exchange 

market and to limit the peso's appreciation.  In nominal 

terms, the Argentine peso depreciated 70 percent in 2002, 

following the financial crisis that began in December 2001. 

The peso subsequently appreciated 15 percent against the 

USD in nominal terms in 2003, and slightly depreciated by 

two percent in 2004, two percent in 2005, one percent in 

2006, and three percent in 2007. 

 

Argentina imposed limited capital controls in July 2003 

through Decree 285/2003, which establishes a regime for 

capital inflows and outflows.  The decree obliges investors 

to keep foreign currency inflows in the country for a 

period of at least 180 days.  In June 2005, the government 

further tightened capital controls through Decree 616/2005. 

The decree increased the minimum holding period for capital 

inflows from 180 to 365 days and established that some 

capital inflows are subject to a 30 percent unremunerated 

reserve requirement to be deposited in a local bank for 365 

days.  This deposit must be denominated in U.S. dollars and 

the proceeds cannot be used as collateral.  The remaining 

70 percent is free to be invested, but is subject to the 

365-day minimum holding period.  Capital inflows related to 

trade transactions, foreign direct investment, or to 

primary public offerings of stock or bonds (from both the 

private and public sector) as well as inflows from 

International Financial Institutions are exempt from 

controls.  Decree 616 diverged from previous regulation, as 

it attempted to discourage capital inflows by increasing 

the cost of bringing capital into the country. 

 

A resident individual or company is allowed to purchase up 

to USD 2 million per month of foreign currency without 

Central Bank authorization.  Any excess is subject to the 

restrictions (e.g., 30 percent reserve requirement and 365- 

day minimum investment period). In December 2006, the 

Central Bank established that capital inflows and outflows 

must be registered under a person's or business' name, 

whereas in the past transactions could be registered 

generically under the local brokerage/exchange house. There 

are special rules regulating the purchase of foreign 

currency to settle financial debt, and for the private 

issuance of bonds denominated in foreign currency. 

 

Decree 260/2002 lifted official conversion rates that had 

been established in early 2002. With this decree, the 

market determines the rate of exchange, with Central Bank 

intervention, and subject to rules established by the 

Central Bank. The Central Bank intervenes frequently in the 

foreign exchange market, with the objective of maintaining 

a competitive peso. 

 

------------------------------ 

Expropriation and Compensation 

------------------------------ 

 

¶3. Article 4 of the United States-Argentina BIT states that 

investments shall not be expropriated or nationalized 

except for public purpose upon payment of prompt fair- 

market value compensation. However, some U.S. investors 

claim the January 2002 pesification of dollar-denominated 

contracts amounts to an effective expropriation of their 

investments. A number of these investors have filed 

international arbitration claims against the government of 

Argentina (see Dispute Settlement Section). 

 

------------------ 

Dispute Settlement 

------------------ 

 

¶4. The GOA accepts the principle of international 

arbitration.  The United States-Argentina BIT provides for 

binding international arbitration of investment disputes 

that cannot be settled through amicable consultation and 

negotiation between the parties.  The Government of 

Argentina is a party to the International Center for the 

Settlement of Investment Disputes (ICSID), the United 

Nations Commission on International Trade Law (UNCITRAL), 

and the World Bank's Multilateral Investment Guarantee 

Agency (MIGA). Companies that seek recourse through 

Argentine courts, however, may not also pursue recourse 

through international arbitration. 

 

In April 2003, the GOA issued Decree 926/2003, which 

created two new agencies to carry out negotiations under 

bilateral investment treaties, including the United States- 

Argentina BIT. The ""Amicable Negotiations Federal Council"" 

(ANFC) made up of representatives of the Ministry of 

Foreign Affairs, the Ministry of Economy and the Federal 

Treasury Attorney, had a mission to devise the government's 

strategies and policies in negotiations with foreign 

investors and could approve proposals made during 

negotiations. However, in July 2003, that body was replaced 

by the ""Unit for the Renegotiation and Analysis of Utility 

Contracts"" (UNIREN), which was created to serve essentially 

the same function, but which is presided over jointly by 

the Ministers of Planning and Economy.  The other entity 

created by Decree 926/2003 is the ""Amicable Negotiations 

Proceedings Body,"" which works under the Federal Treasury 

Attorney. It receives investor complaints, gathers 

information and carries out negotiations with foreign 

investors. 

 

In a December 2006 decision on the 2002 pesification 

decree, the Supreme Court ordered banks to reimburse 

depositors in local currency the total value of deposits 

originally held in U.S. dollars that had earlier been 

frozen.  The decision also upheld the legality of this 

pesification decree, which froze bank deposits and forcibly 

converted dollar savings into devalued pesos.  The ruling 

ordered banks to compensate depositors at 3.08 pesos to the 

dollar -- equal to the pesified deposits they would now 

hold under the original decree, and applying a currency 

conversion rate of 1.40 pesos per dollar, adjusting for 

inflation and adding a four percent annual interest rate to 

be applied retroactively since the pesification began. 

 

Domestic investment dispute adjudication is available 

through local courts or administrative procedures. 

However, independent surveys indicate that public 

confidence in the Argentine judiciary remains weak. 

Therefore, many foreign investors rely on private or 

international arbitration when those options are available. 

Argentina has a strict bankruptcy law similar to that of 

the United States.  However, initiating bankruptcy 

proceedings is more difficult in Argentina, and there have 

been allegations of corruption in the administration of 

bankruptcies and the selection of bankruptcy trustees. 

Creditors can participate in a Chapter 11-like procedure to 

determine the best means of recovering debts from a 

bankrupt firm.  Company directors are personally and 

criminally responsible in cases of fraud, although severe 

punishment for white-collar crime is rare. 

 

A number of U.S. investors have filed ICSID arbitration 

claims against the government of Argentina.  Most of these 

investors consider the January 2002 pesification of dollar- 

denominated contracts, and/or the ex post facto prohibition 

on contracts linked to foreign inflation indices, to be an 

effective expropriation of their investments.  Prior to 

pesification, some U.S. investors engaged in disputes with 

provincial governments over unforeseen changes in tax laws 

and liabilities (often in spite of tax-stability guarantees 

from provincial and federal authorities).  Customs 

treatment and the freeze on public utility rate changes 

have also provoked investment disagreements.  There were 33 

pending cases involving Argentina before the ICSID tribunal 

as of mid-December 2007, 32 percent of total pending ICSID 

cases, with total claims of over USD 13 billion.  Fourteen 

of these pending ICSID cases have been filed under the U.S. 

BIT.  Over the past three years, several ICSID claimants 

who represent a substantial share of total claims against 

Argentina have suspended their ICSID proceedings to 

facilitate further negotiation with the government.  A 

number of the pending cases are reaching their final 

conclusion and, in one case, a final judgment of over $100 

million against Argentina has been upheld.  Government 

payment to the U.S. claimant under this ICSID final award 

remains pending. 

 

---------------------------------- 

Performance Requirements/Incentives 

---------------------------------- 

 

¶5. No performance requirements are aimed specifically at 

foreign investors. Government incentives apply to both 

foreign and domestic firms.  The Ministry of Economy 

administers a complex trade-balancing regime involving 

quotas and tariffs for auto manufacturers including 

minimum-content and other requirements. Special regimes 

also apply to mining, oil and gas, and other natural 

resource sectors.  The special regimes allow producers to 

keep all (as in the case of mining) or 70 percent of their 

foreign exchange revenues off-shore (as in the case of oil 

and gas). 

 

---------------------------------------- 

Right to Private Ownership and Establishment 

---------------------------------------- 

 

¶6. Foreign and domestic investors have free and equal 

rights to establish and own businesses, or to acquire and 

dispose of interests in businesses without discrimination. 

However, as noted above, in June 2003 Argentina enacted 

legislation limiting foreign ownership of ""cultural goods,"" 

which includes media and Internet service providers 

companies, to 30 percent.  An exception to the 30 percent 

limit is made for investors from those countries whose 

foreign investment regimes allow more than 30 percent 

foreign ownership of cultural goods. 

 

----------------------------- 

Protection of Property Rights 

----------------------------- 

 

¶7. Secured interests in property, including mortgages, are 

recognized and common in Argentina.  Such interests can be 

easily and effectively registered.  They also can be 

readily bought and sold.  However, in February 2002, the 

government of Argentina established an extended moratorium 

prohibiting financial institutions from foreclosing on 

delinquent mortgages on primary residences and implemented 

a special procedure for both parties to reach an agreement 

for repaying the mortgage.  This special procedure is only 

applied when delinquency in payment occurred from January 

2001 to September 2003. 

 

The government of Argentina adheres to most treaties and 

international agreements on intellectual property and 

belongs to the World Intellectual Property Organization and 

the World Trade Organization (WTO).  The Argentine Congress 

ratified the Uruguay Round agreements, including the 

provisions on intellectual property, in Law 24425 on 

January 5, 1995.  However, enforcement of intellectual 

property rights is problematic in Argentina.  Argentina has 

been on the Office of the U.S. Trade Representative's 

intellectual property rights ""Priority Watch List"" since 

¶1996. 

 

Patents: Patent protection is an ongoing problem in 

Argentina's intellectual property rights regime, and 

extension of adequate patent protection to pharmaceuticals 

has been a highly contentious bilateral issue.  In April 

2002, the United States and Argentina reached an agreement 

with respect to most of the claims in a World Trade 

Organization (WTO) dispute brought by the United States 

with respect to Argentina's implementation of its TRIPS 

obligations.  Two issues, including the critical issue of 

data protection, remain unresolved.  The United States and 

Argentina have agreed to leave these issues within the WTO 

dispute settlement mechanism for action. New patent 

legislation implementing part of the April 2002 agreement 

was passed in December 2003.  However, some U.S. and 

European pharmaceutical firms are concerned that provisions 

in the legislation, in practice, undercut their ability to 

protect patented products through judicial injunctions. 

 

Copyrights, Trademarks, Trade Secrets, and Semiconductor 

Chip Layout Design 

 

Despite the fact that Argentina's copyright law dates to 

1930, it provides a generally good legal framework to 

protect intellectual property such as books, films, music, 

and software. However, the economic crisis of 2002 led to 

an increase in the use of unlicensed software and optical 

media. Piracy rates of CDs, DVDs, and software are 

estimated at over 60 percent. Enforcement continues to be 

sporadic and pirated products are widely available in the 

market. That said, Argentine authorities began in late 2004 

to show signs of a more proactive posture regarding product 

piracy. Specifically, the government of Argentina passed 

laws designed to allow authorities to mount undercover 

operations for the first time; to electronically flag 

suspect shipments; to facilitate the seizure and detention 

of suspect merchandise; and to more frequently rotate 

customs personnel, among other provisions.  A January 2005 

law which allowed Customs officials to seize shipments 

which violate IP rights - and detain them based on the 

presumption of IP violations, pending a formal decision - 

has not been implemented.  The government has also improved 

the process for trademark registration, decreasing the time 

needed and increasing the rate at which trademarks are 

registered. However, the trademark law, passed in 1980, 

provides what are widely considered to be non-deterrent 

civil damages, and in criminal cases the judiciary is 

reluctant to impose deterrent penalties such as prison 

sentences.  Argentina has no specific law on trade secrets, 

although penalties for unauthorized revelation of secrets 

are applied to a limited degree under commercial law. 

Argentina has signed the WIPO Treaty on Integrated 

Circuits, but has no law dealing specifically with the 

protection of layout designs and semiconductors. 

 

------------------------------------- 

Transparency of the Regulatory System 

------------------------------------- 

 

¶8. During the 1990s, the GOA eliminated virtually all 

restrictions on domestic and foreign trade of goods and 

services, as well as on financial markets. These policies 

increased competition in many industries and sectors. 

Argentine authorities, including the Ministry of Economy 

and a number of quasi-independent regulatory entities, have 

also generally acted to foster competition and protect 

consumers, though not always in a transparent fashion. 

 

Frequent changes to the bankruptcy law during early 2002 

increased creditor insecurity.  In January 2002, the 

Argentine National Congress passed several amendments to 

the bankruptcy law that increased debtors' powers 

considerably, but the National Congress restored many of 

the law's arlier protections for creditors in May of that 

year. 

 

Other regulatory changes in 2002 added to creditor 

insecurity.  The GOA announced in May 2002 that an 

emergency decree passed in late 2001 had voided the 

presidential decree that authorized oil and gas companies 

to keep 70 percent of their foreign exchange revenues 

offshore.  This decree formed the financial basis for most 

foreign investment in the Argentine oil sector. The GOA's 

discovery that the decree had been voided inadvertently 

months before came at a time when it was worried about its 

access to foreign exchange and the devaluation of the peso. 

When the peso began to appreciate in late 2002/early 2003, 

the government of Argentina issued a new decree that gave 

the industry the same right to withhold 70 percent of 

revenues starting January 1, 2003, but the industry remains 

liable for failing to repatriate 100 percent of its 

revenues during the 13-month period from December 2001 and 

December 2002.  The Central Bank opened proceedings against 

some oil and gas producers in 2004 for alleged criminal 

breach of the exchange regime.  According to the Central 

Bank, as of December 2007, one judgment in these cases has 

been rendered in favor of the involved company.  Remaining 

cases are still pending. 

 

The GOA's actions since 2003 have not calmed investor 

concerns about the regulatory environment.  The GOA issued 

a decree depesifying foreign currency-denominated contracts 

of foreign firms doing business in Argentina in 2003, but 

then withdrew the decree and said it was a mistake.  In the 

energy sector, the GOA took measures to avoid energy 

shortages that arose from the increase in demand for 

natural gas and electricity in 2004, including ordering 

reductions in natural gas exports to Chile and electricity 

exports to Uruguay; importing natural gas from Bolivia and 

electricity from Brazil; raising tariffs for industrial 

users; providing incentives to small users to save energy; 

and intervening in the wholesale markets for natural gas 

and electricity. 

 

The GOA has also encouraged companies to invest in the 

expansion of natural gas pipelines, and has encouraged 

power companies to invest compensation owed them by the GOA 

in new power generation plants.  There is concern that the 

aforementioned GOA actions in the energy sector, coupled 

with the GOA's efforts to control retail prices of fuels, 

have created disincentives for companies to invest in 

energy exploration and infrastructure. Inadequate 

investment in those areas could, in turn, result in energy 

supplies not keeping pace with demand generated by 

Argentina's rapid economic growth. 

 

In response to significant energy shortages during 

Argentina's July/August 2007 winter season, the GOA 

mandated several weeks of cutbacks in electricity and gas 

consumption by major wholesale consumers.  This action 

caused a slight decrease in industrial production, rolling 

blackouts in major urban areas, and cutbacks in the 

availability of compressed natural gas used by many 

automobiles and most taxis.  In December 2007, President 

Cristina Fernandez de Kirchner announced a National Energy 

Saving Plan with measures that include seasonal time 

changes, regulation of energy use in public buildings and 

incentives for consumers to adopt more energy-efficient 

home appliances. 

 

In November 2007, the GOA moved to end export tax 

exemptions for several mining companies, and imposed a 

federal levy on mineral exports, ranging from five percent 

to ten percent.  A number of industry participants have 

characterized the action as a significant departure from 

Argentina's 1993-era mining law, which guaranteed tax 

stability for 30 years, and several are seeking redress 

through the courts.  The new system is sill being 

implemented as of the drafting of this report. 

 

In general, national taxation rules do not discriminate 

against foreigners or foreign firms (e.g., asset taxes are 

applied to equity possessed by both domestic and foreign 

entities). Nevertheless, a number of these taxes may impact 

their investment decisions.  As noted above, in June 2003, 

the government of Argentina announced that it would review 

more closely the tax declarations of foreign corporations 

operating in Argentina.  The professed aim of this measure 

is to crack down on the use of offshore shell corporations 

to shelter profits and assets from taxation. 

 

At the national level, there are four major taxes: value- 

added tax (VAT), income tax, export taxes, and a financial 

transactions tax.  The income tax is assessed on income 

earned by companies, at a rate of 35 percent, and on 

individuals at a rate ranging from 9 percent to 35 percent. 

The income tax law presumes that every company earns a 

profit, and based on this presumption, all firms are 

required to pay one percent of the value of their assets 

involved in the production process to the state.  If a 

company is later able to establish that it did not earn a 

profit, the company will be reimbursed within five years. 

Export taxes are tariffs imposed on the export of goods, 

with rates from five percent to 45 percent.  The financial 

transactions tax imposes a 1.2 percent on checking and 

savings account transaction within the national banking 

system.  The VAT is set at 21 percent for most products. 

The VAT is 10.5 percent for interest and commissions on 

debts taken by public transportation companies, fruits, 

vegetables, honey, newspapers and magazines, and some 

capital goods.  The VAT is 27 percent for natural gas, 

electricity, water, and sewage services.  Exporters are 

entitled to receive VAT rebates, but many companies report 

that have experienced extensive delays in their receipt of 

the rebates. 

 

At the provincial level, the system of provincial sales 

taxes has encouraged vertical integration of firms. 

Investors also have expressed increasing concern over the 

incidence of municipal ""supply taxes.""  The Argentine 

constitution gives municipalities the right to set fees for 

the services that they provide, including supply fees. 

Many investors allege that the supply fees charged by 

municipalities do not correspond to the services provided. 

Municipalities have levied fees on the food industry, in 

particular, through a range of sanitary controls that 

occasionally overlap national and provincial regulations. 

Supply tax fees have affected other industries as well. 

Municipalities in Buenos Aires and Cordoba provinces have 

generated the most serious complaints.  Many municipalities 

have begun imposing fees on any advertising visible from 

the public street, including in-store promotion materials, 

such as soft drink coolers, ashtrays, and the packaging of 

individual consumer items, such as batteries. 

 

------------------------------------------ 

Efficient Capital Markets and Portfolio Investment 

------------------------------------------ 

 

¶9. Law 17811 of 1968 regulates public securities offerings. 

The Argentine Securities and Exchange Commission (Comision 

Nacional de Valores) is the federal agency that regulates 

securities markets offerings. Securities and accounting 

standards are transparent and consistent with international 

norms. 

 

U.S. banks, securities firms, and investment funds are well 

represented in Argentina and are dynamic players in the 

local capital markets.  In July 2003, the government began 

requiring foreign banks to disclose to the public the 

nature and extent to which their foreign parent banks 

guarantee their branches or subsidiaries in Argentina.  The 

private pension fund system -- consolidated in 1995 -- 

provided a growing base for capital markets until the 2001- 

2002 economic and financial crises.  Following the 

government's 2005 debt restructuring, private pension funds 

have again become significant players in domestic capital 

markets. 

 

In October 2007, the government introduced new regulations 

requiring the private pension funds (the AFJPs) to 

gradually reduce their investments in Mercosur countries 

(the majority of which are in Brazilian financial assets) 

in a move apparently designed to increase the liquidity and 

depth of domestic capital markets.  According to previous 

rules governing investments, AFJPs could invest ten percent 

of their portfolios in foreign assets.  However, 

investments in Mercosur countries were excluded from this 

ten percent limit, meaning that AFJPs could account for 

them as domestic assets.  To preclude sudden large foreign 

exchange inflows, the government resolution calls for the 

gradual reduction of Mercosur investments, beginning with a 

cap of eight percent of total assets in December 2007, 

falling to six percent in April 2008, four percent in 

August 2008, and ending at two percent in December 2008. 

By December 2008, returned funds should total about 8 

billion pesos (roughly $2.5 billion), according to local 

analysts. 

 

------------------ 

Political Violence 

------------------ 

 

¶10. Since the 2001/2 economic crisis, protests, marches, 

and roadblocks directed at the national, provincial and 

municipal governments, as well as some multinational 

companies, have been commonplace in Argentina, but their 

number, size, and the likelihood of accompanying violence 

have decreased since the crisis.  There have been no cases 

of overtly political violence since the April 2003 national 

presidential election.  In 2005, there were approximately 

20 incidents in which local groups were involved in 

bombings, attempted bombings, or arson, mostly against U.S. 

businesses (Citibank, Bank Boston, Blockbuster, and 

McDonald's in particular).  Anti-American pamphlets or 

graffiti were found at most of the 2005 incidents, none of 

which resulted in injury or death.  Since these 2005 

incidents, no other such events have occurred. 

 

In protest against the construction, and the October 2007 

completion, of a $1.2 billion pulp mill on the Uruguayan 

side of a river that defines the Argentine/Uruguay border, 

Argentine citizens have since December 2006 completely 

blocked one of three bridges that connects the two nations, 

and periodically blocked the other two bridges that connect 

them.  The pulp mill project is being financed and insured 

by World Bank agencies and has met all relevant World Bank 

environmental safeguards.  The Mercosur trade bloc's 

arbitral tribunal considered the case in 2006 and found the 

blockade illegal and a violation of the right of free 

transit of goods and services in the region, but imposed no 

sanctions (and lacks enforcement authority).  The 

Governments of Argentina and Uruguay have asked the 

International Court of Justice for an opinion on whether 

construction of the plant violated a 1975 Argentine- 

Uruguayan treaty dealing with its shared river, and a 

decision is expected in 2008. 

 

---------- 

Corruption 

---------- 

 

¶11. Government corruption and private sector business fraud 

are the subjects of frequent complaints from U.S. 

investors.  U.S. businesses have identified corruption in 

Argentina as a significant problem for trade and 

investment, particularly in procurement, regulatory 

systems, tax collection, and health care administration. 

Some foreign firms also complain that their adherence to 

the letter of the tax and regulatory codes places them at a 

competitive disadvantage. 

 

Transparency International (TI) has a local chapter in 

Argentina.  In the latest TI Corruption Perceptions Index 

(CPI) that ranks countries and territories by their 

perceived levels of corruption, Argentina ranked 105 out of 

180 countries and territories, below the average among 

Latin American countries, and far behind neighbors Chile 

and Uruguay.  Such surveys have contributed to more open 

debate in Argentina about corruption and fraud.  There are 

indications that the GOA is trying to change the culture of 

tax evasion by stepping up enforcement efforts and 

encouraging the use of credit card purchases while at the 

same time using the media to increase public awareness of 

tax obligations and to shame evaders.  While Argentina's 

growing economy is primarily responsible for the government 

of Argentina's solid fiscal performance, anti-evasion 

efforts were a factor in the federal government's record 

tax collections of about 200 billion pesos in 2007, up from 

around 163 billion in 2006 and 150 billion in 2005. 

 

In 2007, a major corruption investigation involving alleged 

bribe payments by employees of a foreign multinational 

corporation to government authorities has been widely 

reported in the press.  The ensuing investigation has 

reportedly significantly delayed a planned expansion of 

Argentina's natural gas pipeline network.  Also in 2007, a 

federal congressman denounced an attempt by a foreign 

multinational to pay a bribe in exchange for supporting 

legislation favorable to the company's future business. 

Media reports that the Foreign Ministry plans to take this 

case to the OECD Anti-Corruption Committee. 

 

Argentina is a party to the OAS Anti-Corruption Convention 

and ratified the OECD Anti-Corruption Convention in 2001. 

Argentina has signed and ratified the UN Convention Against 

Corruption (UNCAC).  It is an active participant in UNCAC's 

Conference of State Parties and is participating in the 

pilot review of the implementation of UNCAC.  It is also an 

active participant in the Mechanism for Follow-up on the 

Implementation of the Inter-American Convention Against 

Corruption (MESICIC).  The government has regulations 

against bribery of government officials, but enforcement is 

uncertain. An anti-corruption office under the Ministry of 

Justice reviews the financial disclosure statements that 

are now required of all senior public officials.  The Anti- 

Corruption Office (ACO) also carries out investigations 

into cases of alleged corruption involving Executive branch 

officials or in matters involving federal funds, except for 

funds transferred to the provinces.  Although nominally a 

part of the judicial branch, the ACO does not have 

authority to independently prosecute cases, but can refer 

cases to other agencies or serve as the plaintiff and 

request a judge to initiate a case.  The majority of high- 

profile corruption cases, however, are investigated by 

individual judges.  These judges, however, may request 

assistance from the ACO in gathering or analyzing evidence, 

especially when related to complicated financial 

transactions. 

 

A recent ACO investigation of GOA public purchases between 

2002 and 2005 revealed that about 75 percent were 

accomplished via direct contracts, often with a sole 

provider, and not via public tenders.  The ACO report 

expressed concern that this process can facilitate 

corruption and does not allow competition among providers. 

The ACO report noted that some GOA officials defended this 

practice, claiming that many contracts were below the 

legally-mandated limit of 10,000 pesos (about USD 3200), 

under which tenders are not required.  GOA officials also 

claimed that sometimes only one provider was able to meet 

contract specifications.  In response, the ACO report noted 

that GOA officials often avoided the 10 thousand peso limit 

by disaggregating contract components so that no part 

exceeded this limit, that contract specifications were 

sometimes written so that only one provider could meet the 

requirement, or failed to widely advertise tenders so that 

other providers could be made aware of them. 

 

Inefficiencies in the Argentine judicial system slow 

efforts to stem corruption.  Argentine laws do not provide 

for plea-bargaining, so many corruption charges are 

difficult to prosecute.  As a result, convictions are rare. 

 

------------------------------- 

Bilateral Investment Agreements 

------------------------------- 

 

¶12. The governments of Argentina and the United States 

signed a BIT in 1991. The agreement was amended, ratified 

by the Congresses of both countries, and entered into force 

on October 20, 1994.  The Argentina-United States BIT can 

be found on the following site: 

http://www.state.gov/documents/organization/4 3475.pdf.htm. 

Argentina does not have a bilateral tax treaty (Treaty for 

the Mutual Avoidance of Double Taxation) with the United 

States. 

 

At present, the GOA has signed and ratified bilateral 

treaties for the protection and promotion of investment 

with all of its major trade and investment partners.  More 

information regarding Argentina's bilateral tax and 

investment treaties is available at www.infoleg.gov.ar. 

 

Argentina has valid double taxation treaties with the 

following countries: Australia, United Kingdom, Denmark, 

Germany, Belgium, Austria, France, Italy, Sweden, 

Switzerland, Spain, Canada, Chile, Bolivia, Brazil, 

Finland, Norway, and the Netherlands.  In addition, a 

number of treaties concerning the exemption of income from 

international transport are in force. 

 

----------------------------------------- 

OPIC and other investment insurance programs 

----------------------------------------- 

 

¶13. The government of Argentina signed a comprehensive 

agreement with the Overseas Private Investment Corporation 

(OPIC) in 1989.  The agreement allows OPIC to insure U.S. 

investments against risks resulting from expropriation, 

inconvertibility, war or other conflicts affecting public 

order.  OPIC programs are currently used in Argentina. 

Argentina is also a member of the World Bank's Multilateral 

Investment Guarantee Agency (MIGA). 

 

----- 

Labor 

----- 

 

¶14. Argentine workers are among the most highly educated in 

Latin America.  Argentine workers were relatively well paid 

by international standards prior to the peso devaluation in 

January 2002.  While high inflation following the 2002 

devaluation significantly eroded the purchasing power of 

wages, sustained government-promoted increases in public 

and private sector nominal wage levels from 2003 have 

reversed this trend.  Wages in dollar terms remain 

competitive, even taking into account Argentina's 

relatively high social security charges and other taxes. 

As of the third quarter of 2007, the official unemployment 

rate was 8.1 percent, down from a 21.5 percent peak in 

2002, but this number excludes recipients of government 

assistance to unemployed heads of households.  If those 

recipients were included, unemployment would be 

approximately 8.8 percent.  According to the Ministry of 

Labor, about 44 percent of workers 14 years and older work 

in the informal sector. 

 

Organized labor continues to play a strong role in 

Argentina.  Sector-specific negotiations between unions and 

industry, although largely market-driven, have often been 

influenced by government suasion on behalf of unions.  In 

the 2002-2004 period, a number of general wage increases 

were mandated by presidential decree. 

 

Argentine law provides unions with the right to negotiate 

collective bargaining agreements and to have recourse to 

conciliation and arbitration.  The Ministry of Labor, 

Employment, and Social Security ratifies collective 

bargaining agreements, which covered roughly 75 percent of 

the formally employed work force.  According to the ILO, 

the ratification process impeded free collective bargaining 

because the ministry considered not only whether a 

collective labor agreement contained clauses violating 

public order standards but also whether the agreement 

complied with productivity, investment, technology, and 

vocational training criteria.  However, there were no known 

cases during the year of government refusal to approve any 

collective agreements under these criteria.  There are no 

special laws or exemptions from regular labor laws in the 

foreign trade zones. 

 

With the unemployment rate now below nine percent, numerous 

employers continue to comment on an increasing shortage of 

skilled labor.  The GOA passed a modest labor reform law in 

2000 to address rigidities in the labor market (i.e., 

increasing collective bargaining flexibility, extending 

trial employment periods, and lowering payroll taxes for 

new permanent hires).  However, the anticipated growth in 

employment did not materialize, as the reforms coincided 

with a deepening of the economic recession produced by 

foreign and domestic factors.  Following the acceleration 

of the financial crisis beginning in December 2001, many 

workers left the formal labor force and instead began to 

work informally, as employers sought to avoid high pension, 

social security, and other taxes on formal employment.  In 

an effort to avoid massive layoffs during the 2002 

financial crisis, severance payments were doubled.  This 

""double indemnification"" labor termination policy was ended 

in September 2007 when official unemployment dropped below 

ten percent.  According to the World Bank's ""Doing 

Business"" survey compiled before this double 

indemnification policy was ended, the cost of terminating 

an employee in Argentina averaged 139 weeks of wages, 

almost double the Latin American average of 59 and more 

than four times the OECD average of 31. 

 

------------------------------ 

Foreign Trade Zones/Free Ports 

------------------------------ 

 

¶15. Argentina has two types of tax-exempt trading areas: 

Foreign Trade Zones (FTZs), which are found throughout the 

country; and the more comprehensive Special Customs Area 

(SCA), which covers all of Tierra del Fuego Province and 

whose benefits apply only to already established firms. 

 

Law 24331 of 1994 establishes the FTZ regime for Argentina. 

Argentine law defines an FTZ as a territory outside the 

""general customs area"" (GCA, i.e., the rest of Argentina) 

where neither the inflows nor outflows of exported final 

merchandise are subject to tariffs, non-tariff barriers, or 

other taxes on goods.  Goods produced within a FTZ 

generally cannot be shipped to the GCA, unless they are 

capital goods not produced in the rest of the country.  The 

labor, sanitary, ecological, safety, criminal, and 

financial regulations within FTZs are the same as those 

that prevail in the GCA. Foreign firms get national 

treatment in FTZs. 

 

Under the current law, the Executive Power may create one 

FTZ per province, with certain exceptions.  More than one 

FTZ per province may be allowed in sparsely populated 

border regions (although this provision has not been fully 

utilized).  Thus far, the National Executive Power has 

permitted FTZs in most of the 24 Argentine provinces.  The 

most active FTZ is in La Plata, the capital of Buenos Aires 

Province. 

 

Merchandise shipped from the GCA to a FTZ may receive 

export incentive benefits, if applicable, only after the 

goods are exported from the FTZ to a third country 

destination.  Merchandise shipped from the GCA to a FTZ and 

later exported to another country is not exempt from export 

taxes.  Any value added in FTZs and re-exports from FTZ is 

exempt from export taxes. 

 

Law 19640, passed in 1972, codifies the Special Customs 

Area (SCA) rules for Argentina.  Unlike FTZ-manufactured 

goods, products manufactured in an SCA may enter the GCA 

free from taxes or tariffs.  In addition, the government 

may enact special regulations that exempt products shipped 

through an SCA (but not manufactured therein) from all 

forms of taxation except excise taxes.  The SCA program 

provides benefits for established companies that meet 

specific production and employment objectives. 

 

The SCA program applies only to Tierra del Fuego Province. 

The government reduced some SCA benefits in the early 

1990s.  Some of these benefits were later reestablished, 

but only for those firms previously established in Tierra 

del Fuego Province.  The SCA program is scheduled to expire 

at the end of 2013.  In late 2006, Economic Ministry 

Resolution 776 abolished export tax exemption enjoyed by 

oil companies operating in Tierra del Fuego Province. 

 

------------------------------------ 

Foreign Direct Investment Statistics 

------------------------------------ 

 

¶16. According to the United Nations Conference on Trade and 

Development (UNCTAD) World Investment Report 2007, the 

total stock of FDI in Argentina at the end of 2006 was 

estimated at $58.6 billion.  Spain, the United States, and 

France remain the top three investors.  Other important 

sources of investment capitalinclude Brazil, Canada, 

Mexico, U.K., Italy, Chile, the Netherlands and Germany. 

 

Also according to UNCTAD, Argentina received 1.3 percent of 

foreign direct investment (FDI) inflows to developing 

countries, and 5.7 percent of FDI inflows to Latin America 

and the Caribbean in 2006.  Both of these shares are well 

below Argentina's average FDI share from the pre-crisis 

1992-2000 period.  Total FDI inflows in 2006 were estimated 

at $4.8 billion.  The stock of U.S. FDI in Argentina in 

2006 was estimated at $13 billion.  U.S. investment is 

concentrated in financial services, agribusiness, energy, 

petrochemicals, food processing, household products, and 

motor vehicle manufacturing. Many U.S. firms substantially 

wrote down the value of their Argentine investments in 

response to the devaluation and pesification of previously 

dollar-denominated contracts. 

 

Argentine firms increasingly invested abroad during the 

1990s (particularly in Brazil, Paraguay and Uruguay), 

although the country has remained a net recipient of 

foreign direct investment.  In 2006, according to UNCTAD, 

its outward FDI amounted to $2.0 billion. 

 

The Argentine Ministry of Economy (http://www.mecon.gov.ar) 

and the Investor's Information Service for Argentina 

(http://www.infoarg.org) have additional detailed 

information on foreign direct investment in Argentina. 

 

KELLY 


=======================CABLE ENDS============================