ARGENTINA

Doing Business
in Argentina
c9813var- 1 - 04/03/2005 - 05:26

Doing Business in Argentina

March 2005

CONTENTS

1. Country Profile
Location and Language Form of Government Political System Population Structure Geographic and Population Data Climate and Natural Resources

2. Economy
General Overview Main Economic Indicators Privatizations Monetary Policies Financial Market Trade Opportunities Behavior of the Argentine economy in 2004

3. Business Presence
Types of Business Associations Publicly-Held Corporation Branches of Foreign Corporations Joint-Venture Books and Records Oversight agencies Fiscal-year financial reporting, and accounting and auditing standards

4. Exchange Control 5. Taxation

General Description of the Tax System Direct Taxation Indirect Taxation Other Taxes Tax Treaties

6. Labor legislation and Social Security

Labor Supply and Relations Other Employee Benefits Main Types of Employment Contracts Social Security

1. Country Profile

1. Country profile
Argentina represents one of the most important pools of natural and human resources in Latin America. A variety of climates, enormous extensions of land, highly skilled and educated people and a solid industrial background are some of the countrys various features. Ernst & Young wishes to contribute to a better understanding and knowledge of the Argentine Republics environment from geographic, economic, accounting, legal and regulatory points of view. For all these reasons, we present Doing Business in Argentina addressed to potential foreign investors. An investment is a significant step and should not be contemplated without adequate professional assistance. This publication will prove to be a helpful preview and summary of conditions, but is no substitute for full or competent professional advice.

1.1. Location and Language

Argentina is a Federal Republic in southern South America, bordering with Bolivia and Paraguay and Brazil to the north, Brazil, Uruguay and the Atlantic Ocean to the east, the Atlantic Ocean and Chile to the South, and Chile to the west. The country occupies most of the southern portion of the continent of South America and is somewhat triangular in shape, with the base in the north and the apex at Punta Dungeness, the southeastern extremity of the continental mainland. The official Language is Spanish.

Brazil

Uruguay Chile Argentina

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1.2. Form of Government

Since 1853, the Argentine Republic has adopted a representative, republican and federal form of government. As from 1983, Argentina entered an uninterrupted era of democracy and in the 90s it introduced significant changes within a price stability context: privatization of stateowned companies, market deregulation, economic openness and amendments to the Tax and Social Security systems. There is a firm commitment on the part of the Government and the major political parties to improve competitiveness and productivity and to encourage foreign investment strongly.

1.3. Political System

The Executive Power is exercised by the President of the Nation who is elected for a term of four years and can be reelected. The President and the Vice President, who is also the President of the Senate, are elected by direct vote. The president is advised by ministers and a cabinet chief; this new constitutional provision has to be implemented by a congressional law. There are also a number of secretariats. The Legislative Power is exercised by the Senate and the Chamber of Deputies. The Senate is made up of three senators for each province, elected directly by the people for a six-year period. One third of the Senate is renewed every two years. The Chamber of Deputies has 257 members elected for four-years terms, half of them are renewed every two years. The Judicial Power is made up of the Supreme Court (nine justices), the Federal Chambers and the Federal Judges. In the provinces justice is administered by the Chambers of Appeal, magistrates and ordinary judges.

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1.4. Population structure

Population totals and breakdown by sex, men to women ratio, and population density, for each province. Year 2001.
Sex Province Total Buenos Aires City (2) Buenos Aires Province 24 Greater Buenos Aires (3) Rest of Buenos Aires Province Catamarca Chaco Chubut Crdoba Corrientes Entre Ros Formosa Jujuy La Pampa La Rioja Mendoza Misiones Neuqun Ro Negro Salta San Juan San Luis Santa Cruz Santa Fe Santiago del Estero Tierra del Fuego, Antrtica Argentina e Islas del Atlntico Sur Tucumn Total Men Women 18,601,058 1,517,680 7,101,324 4,470,740 2,630,584 168,024 493,298 206,184 1,577,398 471,533 589,872 242,399 310,380 150,125 145,089 810,386 481,199 237,889 278,151 544,911 317,491 184,522 96,479 1,544,864 401,496 Men to women ratio (1) 94.9 82.9 94.7 94.3 95.5 99.1 99.6 100.4 94.4 97.4 96.3 100.7 97.1 99.4 99.9 94.9 100.6 99.3 98.7 98.0 95.3 99.4 104.1 94.2 100.4

Area (sq Km) 2,780,403 203 (2) 307,571 3,630 303,941 102,602 99,633 224,686 165,321 88,199 78,781 72,066 53,219 143,440 89,680 148,827 29,801 94,078 203,013 155,488 89,651 76,748 243,943 133,007 136,351

Population density 13.0 13,679.6 45.0 2,392.4 16.9 3.3 9.9 1.8 18.6 10.6 14.7 6.8 11.5 2.1 3.2 10.6 32.4 5.0 2.7 6.9 6.9 4.8 0.8 22.6 5.9

36,260,130 17,659,072 2,776,138 13,827,203 8,684,437 5,142,766 334,568 984,446 413,237 3,066,801 930,991 1,158,147 486,559 611,888 299,294 289,983 1,579,654 965,522 474,155 552,822 1,079,051 620,023 367,933 196,958 3,000,698 804,457 1,258,458 6,725,879 4,213,697 2,512,182 166,544 491,148 207,053 1,489,403 459,458 568,275 244,160 301,508 149,169 144,894 769,265 484,323 236,266 274,671 534,140 302,532 183,411 100,479 1,455,837 402,961

101,079 1,338,523

51,696 657,542

49,383 104.7 680,981 96.6

21,571 (3) 22,524

4.7 59.4

(1) Number of men every 100 women (2) The Federal Capital and at the same time an autonomous jurisdiction similar to a province. (3) Excluding Buenos Aires City proper. The suburban belt surrounding Buenos Aires City lies in the province of Buenos Aires, the largest in the country. (4) The area has been obtained with the Arc Info software (5) Not including the Antarctic Sector and the South Atlantic islands. Source: INDEC (Argentine National Bureau of Statistics and Census), National Census of population, households and housing 2001.

1.5. Geographic and population data

Argentina ranks second among Latin American countries in territorial extension. It covers 2,780,403 square kilometers at the south of South America. The country stretches approximately 3,800 km from north to south and 1,400 km from east to west.

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The number of inhabitants was estimated to be 36,260,130. Populations density is 13 inhabitants per square kilometer and annual vegetative population growth is 1.15%. Some 35% of the population is concentrated in the area comprising Buenos Aires city and its surrounding districts, collectively known as Greater Buenos Aires. The literacy rate is estimated at 96%.

1.6. Climate and Natural Resources

The most notable feature of Argentinas topography is the contrast between the vast plains and prairies in the east and, in the west, the Andes mountain range, which includes the highest peak in the western hemisphere, Mt. Aconcagua (6,959 m 22,900 ft.). Along their path, from where they enter Argentina in the northernmost province of Jujuy and all the way down to Tierra del Fuego, the Andes create a variety of landscapes ranging from the high plateaus of the Northwest - arid and broken by valleys, canyons and colorful hills - to the lakes, forests and glaciers in western Patagonia. In the northeast we find the Chaco, a woodland area covering the basins of the Bermejo, Salado and Pilcomayo rivers. To the east, the huge rivers Paran and Uruguay limit the region known as Argentine Mesopotamia (the provinces of Entre Ros, Corrientes and Misiones), characterized by rolling hills, and ponds and wetlands, remnants of the abandoned beds of these rivers. In east-central Argentina, the largest plains form the Pampas region, perhaps the countrys best known. It comprises the provinces of Buenos Aires, the northeast of La Pampa, the south of Crdoba and the south of Santa Fe. It is intensely farmed with crops and livestock. This landscape is interrupted by the Tandil and Ventana hills in the South and the Crdoba hills to the west. In the south, from the Andes to the Atlantic, lies the stony Patagonian plateau, windswept for most of the year. The coastline is often formed by high cliffs and traces complicated shapes, such as Peninsula Valds, which shelters breeding colonies of marine mammals and sea birds. Argentina has a great variety of climates. In the Pampas region, it is temperate and humid, cold and humid in the westernmost strip of Patagonia, subtropical in the northeast and hot in the northwest. Tierra del Fuego is cold, with strong winds, fog, rain and frequent snowfall.

2.

Economy

2.1. Overview
In the 80s, Argentina was characterized by a highly-inflationary economy and an unstable macroeconomic performance. In addition, the debt crisis resulting from the Mexican moratorium in 1982 caused financial isolation of the region, from which Argentina was not excluded. The different economic sectors behaved erratically and lost competitiveness with other countries. As from 1989, the restrictions on currency transactions were eliminated and government securities were rescheduled. The Government suspended industrial promotion subsidies and paved the way for the privatization of government-owned companies in view of future structural changes to be consolidated in the 90s. Also, the Government started to combat tax and social security evasion. In April 1991, the Convertibility Law was enacted, whereby the domestic currency was fixed at parity at ARS 1 = USD 1. This measure entailed a strict monetary and tax discipline since public financing by the Central Bank's issuance was eliminated because the monetary base was closely linked to international reserves. Monetization in Argentine pesos and US dollars grew considerably and in the first years production benefited from the credit reemergence. Inflation decelerated rapidly, reaching international levels of about one digit. In December 1992, under the Brady Plan, Argentina solved its situation with foreign commercial banks, thus improving the due dates schedule of its government debt. In addition, in the first years of the plan, the Argentine economy benefited from an intense capital inflow in an international high-liquidity context. The capital inflow for foreign direct investment in the 1990-1994 period is estimated to have amounted to USD 15.1 billion. However, as a result of the Mexican crisis in 1994, the reversal of those capital flows caused the economy to contract. As mentioned above, a large portion of capital flows that entered into Argentina were in the form of foreign direct investment. The acquisition of government-owned companies was mostly related to utilities. Also, other sectors such as food, mining, automobiles, oil and gas benefited from these flows. (chart illustrating foreign direct investments entered into Argentina) As from January 1, 1995, Argentina, along with Brazil, Paraguay and Uruguay, formed a customs union known as MERCOSUR (Southern Common Market) of almost 12 million square kilometers, with a population of about 230 million inhabitants and an estimated GDP of USD 635.7 billion. Chile and Bolivia are acceding countries of the bloc. A free-trade area was formed with Chile, which allows being connected with the Pacific in 1996 and with Bolivia in January 1997.

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In December 2004, the South American Community of Nations was formed, seeking to consolidate the union among Mercosur, the Andean Community (Bolivia, Colombia, Ecuador, Peru and Venezuela) and Chile by improving the free-trade area with physical, energy and communications integration. This represents significant investment opportunities in several activities, given that these countries are seeking to harmonize their policies. Argentina currently faces complex international trade negotiations. The agenda is broad and includes, on the one hand, negotiations with the European Union, FTAA (Free-Trade Area of the Americas) and the WTO (World Trade Organization) on a multilateral basis. Additionally, free-trade agreements were reached with China and other South Asian countries, aiming to open up markets and diversify exports. During 2000, international conditions changed: increased volatibility in emerging markets, the fall in US stock markets, and the later stricter monetary policy adversely affected the demand for securities issued in emerging countries, which resulted in more expensive financial costs. Furthermore, foreign private capital flow decreased significantly in light of institutional and political conditions that did not contribute to the trustworthiness and calm climate necessary for a net capital inflow. These factors, coupled with the Argentine local crisis that had been faced since the second half of 1998, adversely impacted on the economic activity performance. In December 2001, Argentina defaulted on its foreign debt payable to private creditors and the currency board was abandoned. Argentina currently has a "dirty" floating exchange rate system and is establishing the bases to implement a monetary policy of inflation targets, similar to that applied by many countries around the world. Also, Argentina is expected to solve its international financial situation in 2005 as a result of its external debt restructuring.

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2.2. Basic Economic Indicators

In 2004, the economic activity continued recovering. The increase in the GDP is estimated at about 8%. Accordingly, the accumulated increase in relation to the minimum hit in 2002 exceeds 17%. The main engine of the economy was investment, with annual growth estimated at 32.5%, whereas private consumption grew by 8.1%. The domestic demand recovery, after a deep decline in 2002, has been a key factor, coupled with the partial lifting of supply restrictions such as the full use of the installed capacity and energy supply problems. The economy will continue recovering after the four-year long crisis as long as investments consolidate, the government debt swap is resolved and a predictable institutional context is established for long-term decisions. Argentinas macroeconomic performance is as follows:
Item Nominal GDP (USD bn) Real GDP (% change) Wholesale price index (% change, for the full year) Retail price index (%change, for the full year) Total deposits (ARS bn, at yearend) (5) Primary fiscal surplus (ARS bn) (1) Operating fiscal surplus (deficit) (ARS bn) (2) Exports (USD bn) Imports (USD bn) Trade balance (USD bn) Current-account balance (u$s bn) Official reserves (USD bn) (2) Total public debt (ARS bn) (3) Exhange rate (ARS/USD period end) Real exchange rate Index (4) Unemployment rate (annual average) 1998 298.9 3.9 0.7 (6.3) 10.1 2.5 (4.2) 26.4 (31.4) (4.9) (14.6) 24.9 109.1 1.0 94.3 12.9 1999 283.3 (3.4) (1.8) 1.1 10.5 0.9 (7.3) 23.3 (25.5) (2.2) (11.9) 26.4 117.7 1.0 84.8 14.0 2000 285.0 (0.5) (0.7) 2.4 34.1 2.7 (6.9) 26.4 (25.2) 1.2 (8.9) 25.1 122.9 1.0 83.8 14.9 2001 268.6 (4.4) (1.5) (5.3) 20.3 (1.4) (8.8) 26.7 (20.3) 6.4 (4.4) 14.9 144.5 1.0 80.3 17.1 2002 97.3 (10.9) 41.0 118.2 68.0 2.3 (4.5) 25.3 (9.0) 16.4 9.0 10.4 137.3 3.39 184.6 19.9 2003 127.1 8.7 3.7 2.0 86.6 8.7 1.8 29.6 (13.8) 15.7 7.5 14.9 178.8 2.96 180.7 17.3 2004 (e) 159.7 8.1 6.1 7.9 105.0 16.9 11.2 33.1 (22.1) 11.3 3.2 19.6 181.2 2.97 180.9 13.5

(e)
(1) (2) (3) (4) (5)

Estimate Primary surplus (deficit) = Total revenues current and capital and capital expenditure Operating fiscal surplus (deficit = Primary surplus (deficit) Interests (broad goal) Liquid reserves plus gold. Source BCRA Total government debt Argentine Treasury bills and in foreign currency as of June 30, 2004. Source Financing Department. Multilateral, period end base Dec. 90=100. As from 2002, it includes rescheduled deposits.

Source: Own calculations based on B.C.R.A. (Central Bank of Argentina) and BBVA Research.

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Main Economic Sectors Actual growth (Q3 2004, as compared to Q3 2003) (*) GDP at Market Prices Goods-producing sectors Agriculture, hunting and forestry Fishing Mining and quarrying Manufacturing industry Supply of electricity, gas and water Construction Service-producing sectors Wholesale and retail trade Hotels and restaurants Transport, storage and communications Financial intermediation Real estate, business services and rentals Civil service, defense and cross-border organizations Education, Social services and health Other community, social and domestic services (*) Preliminary Figures. Source: National Bureau of National Accounts. Inflation - Devaluation Annual Inflation Rate (Consumer) Prices 29.9 23.0 142.7 311.5 4,923.3 1,343.9 84.0 17.5 7.4 3.9 1.6 0.1 0.3 0.7 (1.8) (0.7) (1,5) 41.0 3.7 6.1 Exchange rate increase (% annual rate) n/a n/a n/a 337.05 14,484.8 186.6 78.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 239.0 (12.6) 0.33 8.3 9.2 2.5 (29.6)
(2.6)

9.5 2.7 26.1 6.6 13.6 6.6 11.8 (3.0) 3.9 2.1 3.2 7.6

Period 1951 1960 1961 1970 1971 1980 1981 1988 1989 (1) 1990 (1) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 (1) Hyperinflationary years. n/a Not available.

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2.3. Privatizations
In August 1989 the National Congress enacted Law N 23,696 (the State Reform Law). In its Chapter II, this law authorizes the Executive Branch to proceed to the total or partial privatization, total or partial concession or even to the liquidation of the business enterprises, companies, establishments or estates that had been "subject to privatization". At a second stage, on October 3, 1990 the Executive issued Decree 2074/90 which set 180-day deadlines for defining the bidding terms and conditions of various state-owned companies and entities managed or controlled by the government. The most important of such privatizations were:
Area Telecommunications (1) Air transportation (2) Energy (3) Enterprise ENTel (telephones) Aerolneas Argentinas YPF S.A. YPF central oil areas YPF secondary oil areas SEGBA (electric power) Gas del Estado (gas transportation and distribution) Agua y Energa (electric power) Ferrocarriles Argentinos (various branches) Vialidad Nacional (National Highway Board) Various business enterprises controlled by the Defense area, OSN (the government-run waterworks) Caja Nacional de Ahorro y Seguro Banco Hipotecario Nacional Aeropuertos Argentina 2000 Correo Argentino Manner Full privatization Partial privatization

Concession/ Association Full privatization Full privatization Partial privatization Concession Concession Sale of shares held by the government 30 year-concession Full privatization Partial privatization 30-year concession 30-year concession

Railroads Roads Defense (4)

Water (5) Savings and Insurance System

Communications Post office (1) (2) (3) (4) (5)

2.27 billion USD cash and 5.03 billion in debt securities at face value. 260 million USD cash and 1.61 billion in debt securities at face value. 6.13 billion in USD cash and 3.22 billion in debt securities at market value. 270 million USD cash and 180 million in debt securities at face value. Offered a 26.9% utility-rate reduction.

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2.4. Monetary Policy

After the collapse of the currency board system in December 2001, Argentina is in the process of developing a new monetary policy. The Central Banks objective is to shift from an exchange-rate anchor to a monetary anchor (money aggregates targets). The foundation is being laid for an inflation targeting system, such as applied by Australia, Canada, Brazil, Chile and other countries. The focus is on controlling the inflation rate through the money supply. One of its main advantages is that influence is direct and effects are easily measurable but disadvantages include that the relationship between money supply and inflation varies and impact is undefined. Money circulation velocity fluctuates while capital flows and foreign shocks have influence as well. Moreover, demand for money is hard to estimate. Despite all these factors, the gradual normalization of the banking system and the relaxation of controls on foreign exchange and capital flows lay the groundwork for implementing this system. At present, all foreign exchange transactions take place on a single and free market. The Central Bank intervenes in accordance with the Monetary Program agreed with the IMF. In view of the transition process from a monetary control system based on interim quantitative targets (monetary aggregates) towards a system that fixes a benchmark interest rate, the B.C.R.A. continued taking measures to enhance the development of the repos market, which give it more powerful tools to manage the surplus liquidity of financial institutions. For such purpose, it devised a mechanism that will allow financial institutions to make early repayments of the assistance granted thereto during the 2001-2002 crisis. Controls on foreign exchange and capital flows have been increasingly relaxed since December 2002. There are no longer any minimum requirements on the proportions of export revenues to be converted into pesos through the Central Bank of Argentina and there are no restrictions on payment of interest, distribution of dividends or income, or principal amortization.

2.5. Financial Markets

Macrofinancial system As an integral part of the Argentine economic and financial system, insofar as the flow of money is concerned, a macrofinancial system may be identified, consisting of the following markets in addition to the exchange market: the capital markets the financial market (banking system)

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2.5.1. The capital markets

a) General Features This market brings together various operators so they can interact in the public offering of securities. Through this market both business enterprises and the Government obtain funding from investors through a variety of transactions related to trading shares and government debt securities and private securities. The operators making up the Capital Market may be grouped as follows: 1. Stock Market Stock Exchanges Securities Markets Stockbrokers Stock Exchange companies Listed Companies Depositary companies Depositary banks

2. Mutual funds Mutual funds Management companies Depositary Companies

3. Open or over-the-counter market Open-market brokers Electronic Over-the-Counter Market

All these operators are supervised and controlled by the National Securities Commission (CNV), a self-governing entity that authorizes and controls the parties involved and the markets in which the public offering of investment securities takes place. b) Major institutions Stock Exchanges Stock exchanges are organized as civil associations or stock corporations; they handle all kinds of transactions in negotiable securities and shares. Among their functions, we can mention: Listing, suspending or de-listing investment securities. Controlling compliance with the listed companies legal and regulatory requirements.

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Issuing standards and taking measures to ensure the truthfulness and accuracy of the listed companies' financial statements and other documents. Organizing clearing houses for the settlement of trading.

There are 14 stock exchanges in Argentina; six of these have affiliated securities markets and are authorized to list securities: Buenos Aires, Crdoba, Mendoza, Santa Fe, La Plata and Rosario. The oldest and most important of them is the Buenos Aires stock exchange (BCBA), founded in 1854. The Stock Exchange is legally empowered to admit (list), suspend and cancel (de-list) securities for trading, in accordance with its own regulations as long as ratified by the CNV (National Securities Commission). The Stock Exchange has a Securities Committee, appointed by the Governing Board and comprising members of the various stock-exchange related institutions and other market constituencies and stakeholders, which sets standards and regulations and makes decisions regarding listing and trading. The listed companies are required to submit their annual and quarterly financial statements and report any significant event to the Stock Exchange. The Stock Exchange has oversight powers and is empowered to suspend trading of any given security whenever it deems necessary in order to control or prevent abnormal price alterations. The Stock Exchanges functions include: keeping record of transactions, publishing trading volumes and prices, and publishing any information that could affect trading prices. There are two systems of listing on the BCBA (one special and one general) with different information requirements. The special section (more information requirements) is compulsory for companies with capital exceeding 60 million pesos, sales revenues or annual services higher than 100 million pesos, 1,000 shareholders who are not related by company management agreements (1,200 shareholders if the shares lack voting rights), securities listed for a face amount higher than 60 million. The remaining companies can choose the section on which they would rather be. The companies listed on the general section need not submit quarterly financial statements but a summary of events should be filed instead.

Securities Markets Securities markets are organized as publicly-held corporations in which stockbrokers and Stock Exchange Companies hold shares (a.k.a. seats). Their objective is to record, guarantee and settle trading. In addition, they trade investment securities authorized for public offering, keep stockbrokers and Stock Exchange companies registers, control them and improve disciplinary measures, etc.

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Mercado de Valores de Buenos Aires MVBA (Buenos Aires Securities Market), affiliated with the BCBA, is the most important securities market in Argentina. The MVBA is a sociedad annima (corporation) and its capital stock is made up by 250 shares (seats). Its shareholders are the only individuals or legal entities entitled to trade securities on the BCBA, either as principal or agent. The MVBA monitors its members and the transactions carried out on the floor. In 1990, brokerage firms with a single corporate objective (such as subsidiaries and affiliates of commercial banks) were admitted to the securities market as full members. Thus, most of the main Argentine commercial banks have set up their own brokerage firms. In the BCBA, securities are traded by means of two different systems: a) The Traditional Round (Rueda Tradicional) operates on weekdays from 1:00 PM to 6:00 PM. b) The Continuous Round (Rueda Continua) operates on weekdays from 10:00 AM to 6:00 PM. Private transactions of publicly traded securities made through registered brokers and brokerage firms are registered and published in the Continuous Round. In order to control price fluctuations, the Mercado de Valores operates a system, which interrupts the negotiations of certain shares for thirty minutes if they have risen or fallen more than 10% on the prior day. If after such period of time, the quotation raises or falls an additional 5% (i.e., 15% higher or lower than the shares prior-date price), the Mercado de Valores interrupts the negotiation for the rest of the day. Trading of such securities continues on the following weekday. In addition, there is a significant OTC market, the Mercado Abierto Electrnico SA (MAE) for privately trading listed securities. The MAE is an electronic market similar to the Continuous Round but independent from it. Only brokers registered with the CNV are authorized to trade securities on the MAE. Prior to May 3, 1993, public securities and corporate bonds were traded through the MAE system. As from such date, based on an agreement between the BCBA and open-market brokers, the operations of the BCBA and the MAE were reorganized so that shares can only be traded on the BCBA, while corporate bonds can be traded on any of the two. Transactions performed on the securities market and on the MAE are generally settled within 72 hours of the negotiation, as agreed by the parties. Caja de Valores (depository trust company) It is a sociedad annima owned by the BCBA, the MVBA and certain provincial securities markets. Caja de Valores is the depository trust company and acts as the securities clearing house, provides the facilities for securities to be deposited and acts as transfer and payment agent. It also settles securities transactions made on the BCBA through its computer-based book-entry system. c) Capital Markets Regulations Argentine capital markets are supervised by the CNV and the Central Bank. In general, securities markets in Argentina are governed by Law No. 17,811 as amended (the Public Offering Law) authorizing the creation of the CNV and establishing the legal framework for securities markets, brokers and public offerings. The CNV issues regulations related to securities markets, which authorize IPOs and supervise brokers, which include subsidiaries and affiliates of financial institutions.

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In accordance with the Public Offering Law, securities must be publicly traded through markets established as sociedades annimas (stock corporations), which must be members of stock exchange. CNV resolutions establish a system of self-regulated entities through which each of them (currently including each stock exchange and the MAE) is responsible for developing and implementing the regulations of the related securities market subject to the approval and control from the CNV. Internal regulations of each stock exchange for their securities markets establish the terms for public offerings, admittance of brokers and transactions. Each securities market is responsible for the regulation and supervision of all the transactions made by its shareholders and can penalize its members. Each market guarantees that the transactions carried out will be settled by its brokers to make transactions easier. In accordance with Argentine legislation (unless otherwise instructed by the investor) stock exchange and open market brokers must deposit in Caja de Valores SA most of the bonds and shares traded on the securities markets and the MAE. Certain changes in the regulations allowed new financial products to be issued and traded on the Argentine capital markets. For example, short, medium, and long-term corporate bonds under Law No. 23,576 as amended. Corporate bonds are private debt securities which can be issued by sociedades annimas (corporations), sociedades en comandita por acciones (master limited partnerships), non-profit associations, cooperatives, and branches of foreign companies organized under section 118 of Law No. 19,550. Funds obtained from the issuance of these securities are used to restructure liabilities, make capital investments and/or increase working capital. These corporate bonds may be issued in Argentine pesos or in any foreign currency. They may also be secured by certain assets of the issuer under a security agreement or by the issuers assets taken as a whole, or other means, such as a bank guarantee. In addition, these bonds may be unsecured or convertible into shares. In November 1991, financial transaction charges were deregulated, and securities transfer and stamp taxes on securities listed on the stock exchange were eliminated. The CNV regulations provide for information presentation and disclosure standards, and prohibit certain unfair trading practices, such as price rigging and insider trading. To be able to sell securities by public offering in Argentina, the issuer is required to meet the CNV requirements associated with the issuers financial and operating background, the business management, and other business matters. Only such securities whose public offering has been approved by the CNV may be listed on the Buenos Aires Stock Exchange. CNV approval does not imply any type of certification or guarantee on the merits or of the quality of the securities involved, or of the issuers financial standing.

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2.5.2. The financial market

Introduction In Argentina, the banking business is governed by Law No. 21,526 of 1977. Under this law, the BCRA is the enforcement authority and accordingly issues regulatory standards and controls the institutions included in the law (authorization and operating conditions within the banking industry; definition of permitted, prohibited and limited transactions; monetary controls; meeting certain operating ratios; information; accounting and control system; dissolution and liquidation; etc.). Local banks are considered to have foreign capital when holdings of foreign (nonresident) individuals and legal entities exceed 30% of capital stock (either directly or indirectly), or the foreign shareholder controls a sufficient number of votes to impose its decisions at the shareholders' meetings. In such case, they are required to register with the Registry of Foreign Investments. Foreign banks may only do business in Argentina as investment or commercial banks and must have prior BCRA authorization to be able to set up branches in Argentina. In addition, there are minimum capital requirements for these entities to be allowed to do business. Features of the Argentine financial system Classification Commercial banks Government-owned: federal, provincial and municipal. Private local banks with Argentine capital: cooperative banks and noncooperative banks. Foreign banks: private local and local branches of foreign banks.

Investment banks Government-owned provincial banks. Local banks with foreign capital.

Mortgage banks Development banks Savings banks Finance companies Savings and loan associations for building homes or other real estate property Credit associations Representative offices

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Funding systems. Main transactions Financial transactions are basically made in pesos (legal tender), in US dollars and in government securities. The segments making up Argentina's financial system are: Peso segment Foreign-currency segment Liquid network (the banks own capital - all the banks in the financial network)

The main transactions are: Overdraft Promissory notes Discount of bills Mortgage loans Collateral loans Consumer loans Credit cards Demand deposits Certificates of deposit Common savings deposits Deposits in Argentine-government securities Interbank transactions Swaps repos and reverse repos Banker's acceptances Spot exchange transactions Forward exchange transactions

Main regulations Operating ratios Maintenance of a minimum equity (minimum capital) Compliance with a maximum limit for investing in other companies Compliance with limits to granting credit; these limits are measured in terms of the minimum equity required Monetary regulations There are minimum reserve requirements Guarantee of deposits: optional Prohibited and limited transactions Banks are not allowed to engage in commercial or other business, for their own account Banks are not allowed to encumber their assets without prior BCRA authorization Banks are not allowed to accept their own shares in security of debt. Banks are not allowed to operate with related companies and/or individuals on more advantageous conditions than those they grant to the rest of their customers. Banks, except commercial banks, may not issue bank drafts or make transfers between different financial markets.

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Credit Lines In Q4 2004, loans in Argentine pesos to the private sector accelerated, increasing by about ARS 2.9 billion, whereas loans in foreign currency to the same sector increased by USD 150 million. Thus, the increases accumulated over the year were ARS 7.3 billion (27.3%) and USD 210 million (22.5%), respectively. Loans to the private sector totaled ARS 38.7 billion, which represents 8.3% of the GDP, still far below the 23% at the end of 1998. Differentiating between credit lines, consumption financings were higher than commercial ones in the last quarter of the year. The increase in credit brings about an increase in the monetary multiplier. Therefore, during 2005, the monetization of the economy is expected to be based on the secondary money creation more than on the expansion of the monetary base. During Q4 2004, lending interest rates, in general, continued to decrease, except for those related to personal loans, which increased slightly.

2.6. Trade Opportunities

In March 2001, Argentina, Brazil, Paraguay and Uruguay signed the Treaty of Asuncin, which established that basis to form MERCOSUR (Southern Common Market). It currently operates as a customs union and represents a strategic platform for different kinds of business networks. The change in relative prices following the devaluation of the peso that began in December 2001 opens business opportunities in many sectors. The industries considered strategic are related to the exporting sector, technology and infrastructure. As regards the domestic market, there are good opportunities in sectors connected to the process of substitution of imports (metalworking and mechanics, industrial materials, among others). The sectors that afford the greatest opportunities are: Agriculture Mining Oil & gas Forestry & timber farming Tourism Telecommunications Biotechnology Information technology (software) Automobiles

ECONOMY

2.7. Behavior of the Argentine economy in 2004

In 2004, economic activity continued recovering and GDP annual growth is estimated to exceed 8%. Such behavior results from the following two factors: a) The recovery of domestic demand; and (b) the partial overcoming of the economy supply restrictions, for example, the energy crisis. Regarding the first factor, investment was the main driver of growth, with a rise of 32.5% p.a. basically due to the increase in the construction sector and in capital assets. Additionally, the better business climate has positively contributed to an investment-led growth. Private consumption came second, increasing by 8.1% p.a., which shows the employment improvement, salary restoration and increasing consumer confidence. Within the second factor, the measures taken by the government contributed to minimizing the effects of energy scarcity and were based on the increase in gas and fuel oil imports from Bolivia and Venezuela, respectively. Exports to Chile were also restricted and domestic consumption disincentives were applied. The fastest-growing sectors in 2004 were as follows: automobiles (53.3%), construction materials (23.4%), white meat (22.1%), dairy products (21.1%), publishing and printing material (20.5%), among others, according to EMI (Monthly Industrial Activity Estimator) published by INDEC (Argentine Statistics and Census Institute). The retail inflation was 6.1% mainly due to the adjustment of regulated prices and readjustment of profit margins by rising the prices of some products and services such as taxicabs, cigarettes, HMOs, among others. This value is within the range foreseen in the monetary program. The wholesale inflation was 7.9%. The real exchange rate slightly decreased from high values. The nominal exchange rate was ARS 2.97 = USD 1 at year-end. The Central Bank played a significant role in the foreign exchange market through currency trading transactions, as well as through the placement of Nobacs and Lebacs1. Monetary and financial variables performed favorably, reflecting a more predictable monetary policy and a gradual normalization of the financial system and the foreign exchange market. Total deposits increased, amounting to ARS and USD 117.5 billion. In addition, international reserves amount to USD 20 billion, recovering their level prior to the crisis. Regarding the fiscal situation, the good tax collection was supported by export duties (effective as from March 2002), the growth in VAT and income tax collections, as well as an increased tax compliance by taxpayers due to a better economic situation. The primary fiscal surplus (before interest payments) of the Argentine government was 3.9% of the GDP. The government seeks to maintain fiscal solvency during 2005 due to increasing debt obligations to be borne as a result of the swap closing. Additionally, the agreement with the IMF should be closed, which entails principal payments to such agency.

Nobacs (Central Bank notes) and Lebacs (Central bank bills) are financial instruments introduced as from 2002. Nobacs are issued for a longer term than that of Lebacs.

ECONOMY

The general provisions of the defaulted debt restructuring plan were designed throughout 2004 and the process was launched in early 2005. The swap entails converting 178 financial instruments into eleven new instruments related to three types of bonds: Par, Discount and Quasipar, plus a GDP-related unit, which will be delivered to creditors who join the swap in direct proportion to their respective offers. Another change will be that the prior debt instruments had been governed by eight different national legislations, whereas the new instruments are issued under only four legislations. Nonperforming securities will be governed by the laws of New York, England, Argentina and Japan. The defaulted debt to be swapped would amount to about USD 81.8 billion in outstanding principal amount (USD 79.7 million) plus unpaid accrued interest through December 31, 2001 (USD 2.1 billion). The amount of new securities to be issued ranges from USD 41.8 billion if the plan exceeds 70% of the creditors' acceptance and USD 38.5 billion if this percentage is not exceeded. The government expects to conclude the process in early April 2005. Imports grew faster than exports, but the trade balance surplus remains unchanged. The rapid increase in imports primarily results from quantities (capital assets), whereas the higher increase in exports was in terms of prices, specifically soybean and oil. This contributed to Argentinas good terms of exchange during 2004, which are expected to continue in 2005 but at lower levels. The marked increase in Chinas participation as destination of Argentine exports, as well as the rise in purchases from Chile should be highlighted.

3.

Business Presence

3.1. Types of Business Presence

The forms of business organization covered by the Business Associations Law (No, 19,550) are as follows: Sociedad Annima - S.A. (Stock Corporation) Publicly-held Closely-held

Sociedad de Responsabilidad Limitada S.R.L. (Limited Liability Company) Corporation in which the Government is the majority shareholder Sociedad en Comandita (Limited Partnership) By shares Simple

Sociedad Colectiva S.C. (General Partnership) Capital and Industry association Branch office of a foreign corporation

The most common forms of business organization used by foreign investors in Argentina are the publicly-held corporation (Sociedad Annima) and to a lesser extent the local branch of a foreign corporation. The main features of both are described below.

3.1.1. Stock corporation (Sociedad Annima)

Capital is represented by shares of stock. The shares are required to be registered and nonendorsable. They may be represented by certificates or recorded in accounts carried in the shareholders name in a share certificate registry by the issuing corporation or by commercial or investment banks or by authorized share depositary entities. Furthermore, according to the rights they grant, shares may be classified into common or preferred shares. Preferred shares usually have priority upon payment of dividends, do not carry voting rights and, in general, are entitled to fixed accumulative dividends. There must be at least two shareholders. The shareholders liability is limited to the capital paid in by them. The main characteristics of stock corporations (corporate purpose, duration, management, etc,) are provided in the articles of incorporation or bylaws that are to be approved by the appropriate governmental regulatory agency of corporations (in the Autonomous City of Buenos Aires, the Inspeccin General de Justicia IGJ), published in the Official Bulletin, registered with the Public Registry of Commerce, and notarized.

BUSINESS PRESENCE

If the shareholders of a corporation organized in Argentina are foreign business associations, they have to file their articles of association or bylaws with the Public Registry of Commerce. The shareholders must hold at least one regular meting every year with the main object of approving the financial statements, distributing profits and electing directors and statutory auditors. A Board of Directors consisting of one or more persons and designated annually by the shareholders meeting is responsible for corporate administration. Corporations, whose characteristics place them under permanent regulatory supervision, must have at least three directors. As established by IGJ (Argentine Business Associations Regulatory Agency) General Resolutions 20/04, 21/04 and 1/05, bylaws should establish the directors guarantee, which should meet the following rules: (a) It should consist in bonds, government securities or amounts in local or foreign currency deposited with financial institutions or securities clearing houses, to the company's order or in sureties, bank guarantees, collaterals or civil liability in favor of the Company. The cost should be borne by each director. In no case will the guarantee be created by the direct cash inflow into the Companys cash; (b) When the guarantee consists in deposits of bonds, government securities or amounts in local or foreign currency, the conditions to create such guarantee should ensure its unavailability while the expiration term of potential liability actions has not elapsed (at least three years as from the end of the office term); and (c) The guarantee amount will be equal for all directors. It cannot be lower than ARS 10,000 for each of them (in the case of sociedades de resposabilidad limitada (limited liability companies) with a capital lower than ARS 12,000, the guarantee will amount to ARS 2,000 per manager). Alternate directors are not required to give any guarantee until they hold office as a substitute for regular directors. Tight controls are imposed to verify compliance with such guarantees, such as IGJ verifications before it approves Company organizations, changes of companies types of business organization, registrations of director appointments, and, also, the statutory auditors are required to report on compliance in this respect. The new guarantee system is applicable to all appointments or renewals as from February 7, 2005.

Stock corporations are subject to a series of special controls, namely: Stock corporations with special characteristics (see point 3.4.) are supervised on a permanent basis, whereas supervision for the other corporations is limited to the articles of incorporation or bylaws, any amendments thereto, and changes in capital stock.

BUSINESS PRESENCE

The stock corporations subject to a permanent supervision are required to be privately controlled through, according to the circumstances, a Sndico (individual statutory auditor) or a Comisin Fiscalizadora (statutory audit committee consisting of an odd number of members, generally three, appointed by the shareholders' meeting). The other corporations may dispense with the duties of such statutory audit committee. In that case, the shareholders are entitled to exercise such control individually. All corporations may have a surveillance committee to act in conjunction with the statutory audit committee or even replace it. The surveillance committee roles are broader than the statutory audit committees.

3.1.2. Branches of Foreign Corporations

To be allowed to do business as a Branch under the law, it is necessary to provide evidence of the existence of the parent company abroad, register the parents articles of association or bylaws with the Public Registry of Commerce, appoint representatives, and register them likewise. Branches are subject to permanent control by the appropriate governmental regulatory agency of corporations (in the Autonomous City of Buenos Aires the Inspeccin General de Justicia IGJ), and have to meet the same requirements as those in effect for stock corporations subject to such control. Branches have to keep accounts separate from those of their parent, and file financial statements with the appropriate governmental regulatory agency of corporations (in the Autonomous City of Buenos Aires the Inspeccin General de Justicia IGJ) within 60 business days of their fiscal year-end. IGJ (Argentine business associations regulatory agency) General Resolution No. 7/2003 set forth the following significant additional requirements for the companies organized and existing abroad, both for those requesting the registration to operate in Argentina and those already existing, for the purpose of showing that such companies carry out significant business activities outside Argentina, which are summarized in the following paragraph. Subsequently, I.G.J. GR 2/05 established tighter measures in certain cases. It established that it will not register foreign companies that have no capability or legitimacy to act in the territory where they are organized to carry out their own activity or with the scope described in sections 118 (third paragraph) and 123, Law No. 19,550, respectively, except that these companies have a special purpose or the so-called "vehicle" companies, where the requirements of GR 7/03 are met through their direct or indirect parent. To be able to operate in Argentina, such companies should previously comply with all Argentine laws. For such purpose, they should comply with the provisions of I.G.J. GR 12/03.

BUSINESS PRESENCE

a)

Companies requesting the registration: They will be required to report any legal prohibitions or restrictions existing in their country of origin to perform all or their main activities and show that they effectively operate abroad, with at least one of the following conditions: (a) existence of one or more agencies, branches or permanent representations, (b) the ownership of equity interests in other companies qualifying as noncurrent assets, according to the definitions contained in generally accepted accounting standards or principles, and (c) the ownership of fixed assets in their country of origin.

b)

Registered companies: The branches, agencies or representations (section 118, third paragraph, Law No. 19,550) are required to file on an annual basis jointly with financial statements, an accounting certification with the IGJ regarding the structure and value of assets held outside Argentina, indicating whether they are current or noncurrent, as of the date of closing the financial statements of such branch, agency or representation. In addition, the companies organized and existing abroad holding only permanent ownership interests in an Argentine company (section 123, Law No. 19,550) must file the same information required of the abovementioned branches and show compliance with AFIP (Federal Public Revenue Agency) General Resolution No. 1,375 (information on economic transactions between Argentine residents and the foreign company) for the calendar year immediately prior or shorter period applicable.

c)

Special-purpose or vehicle foreign companies: According to GR 22/04, foreign companies applying for their registration or those already organized that are required to make the abovementioned filings, belonging to groups of companies whose heads or direct or indirect parents are organized and domiciled abroad and subject to a foreign law, will be exempt from meeting the requirements of GR 7/03, provided that they meet the following requirements:

(i)

Filing of an express representation from the administration body that the Company is exclusively an investment "vehicle" or instrument used for such only purpose by another group company that directly or indirectly controls it based on the ownership interests held. Evidence, by the same means as those established by GR 7/03, that the requirements provided for in this resolution are met by the parent, either direct or indirect. If there is more than one indirect parent, the evidence should pertain to the closest in the chain of companies.

(ii)

(iii) Filing of a sworn statement by the representative including: (a) an organization chart of the group; and (b) the identification of the partners of the vehicle company and of those of its direct or indirect parents.

BUSINESS PRESENCE

d)

Foreign companies from low- or nil-taxation jurisdictions or jurisdictions that do not cooperate in combating money laundering and transactional crime: According to GR 2/05, in this type of companies, IGJ will evaluate according to a restrictive criterion the compliance with the requirements established by GR 7/03, although the laws effective in the place of their creation do not establish any acting prohibitions or restrictions with respect to such companies in their own territory. Particularly, foreign branches (third paragraph of section 118, Law No. 19,550) should prove that they effectively carry out a significant business activity from the economic standpoint in the place of their organization, registration or incorporation, by filing the last financial statements and a detailed description of the main transactions performed in such place during the period covered by such financial statements or during the immediately preceding year if the period covered is shorter, specifying dates, parties, purpose and economic volume involved. The additional requirements established in GR 2/05 will not be applicable to foreign vehicle" companies that are already registered or to be registered under GR 22/04. Notwithstanding the foregoing, in these cases IGJ will send the background of such companies to A.F.I.P. (Argentine Public Revenue Agency) for the latter to issue a decision on the use of the vehicle from the tax viewpoint.

e)

Consequences of non-compliance with IGJ General Resolution 7/2003. Should a foreign company intending to be organized in Argentina fail to comply with General Resolution 7/2003, the IGJ will deny the registration. In addition, should a foreign company that has already been created fail to comply with such resolution, the IGJ may require that its by-laws meet Law No. 19,550, as established by IGJ General Resolution 12/2003 to adopt one of the types of companies regulated therein, i.e. it will be required to become a local company whenever it lacks assets abroad, its noncurrent assets abroad are not significant or the local head office is the place of the Companys effective management. The IGJ may request the judicial deregistration, as applicable, and, if so, the liquidation in the case of foreign branches organized under section 188, third paragraph, Argentine Business Associations Law whenever they fail to comply with the abovementioned requirements within the term of 180 days or to file the annual additional information required under General Resolution No. 7/03 during two consecutive years as from January 1, 2004. In the case of Argentine companies with companies organized abroad as shareholders, the IGJ will not register the documentation related to the shareholders or partners meetings when they had participated exercising their voting rights, or foreign companies not registered under section 123 of the Argentine Business Associations Law, notwithstanding such participation, to the extent that their votes had served to build the corporate will. In addition, in the case of those companies required to file financial statements, the approval thereof and further corporate decisions made in the related meeting under the abovementioned conditions will be deemed erroneous and ineffective for administrative purposes.

BUSINESS PRESENCE

In the case of foreign companies that have no capability o legitimacy to act in the territory and in the case of foreign companies from low- or nil-taxation jurisdictions or jurisdictions that do not cooperate in combating money laundering and transactional crime (excluding vehicle companies, as mentioned in (c) above), even if they have no acting prohibitions or restrictions in their own territory, the IGJ will judicially request the related deregistration of such companies when as of the effective date they fall under some of the following situations:

(i)

When the filings required by IGJ General Resolutions Nos. 7/04 and 2/05 are not duly met within an unextendable consecutive 90-day term as from the effective date of GR 2/05 (02/17/05). When, within the term mentioned in the preceding paragraph, they do not make the filing established by IGJ GR 12/03, thus failing to meet the requirements provided for therein to conform to Argentine laws.

(ii)

3.2. Joint Venture

Cooperation Agreements Between Enterprises Cooperating groups (agrupaciones de colaboracin), Joint ventures: Unin Transitoria de empresas U.T.E. (Temporary associations of business enterprises)

In both of these cases, the law expressly states that no new company or new legal entity is organized. There is merely association for a purpose and this relationship is governed by an agreement reached by the parties concerned. Contracts of this nature must be registered with the Public Registry of Commerce. Cooperating groups

The object of theses groups is to help them develop certain phases of their business, or to enhance or increase the results of such business. They cannot be profit-making associations, and any economic advantage that may derive from the association will go straight to the group members assets. The groups assets form part of their common operating fund, which is considered and indivisible estate. The creditors of the individual members cannot enforce their claims against the common fund. Joint ventures (U.T.E. Temporary associations of business enterprises)

The object of these associations is to carry out a concrete service or supply some concrete item, within or without the Argentine territory, Bankruptcy or liquidation of any one member will not cause the contract of temporary association to lapse; the joint venture can continue in business with the remaining members.

BUSINESS PRESENCE

3.3. Books and Records

All business enterprises domiciled in Argentina must keep accounting records of their transactions, The mandatory books of account are the Journal and the Inventory and Financial Statements Book, as well as the subsidiary books that complement them. Also, corporations are required to keep books containing the minutes of directors and shareholders meetings, the record of attendance at shareholders meetings and the shareholders register. These books must be bound, paginated, and identified by the Public Registry of Commerce, However, business associations, cooperatives, and civil associations and foundations using mechanized or electronic data processing methods may request the appropriate regulatory entity to exempt them from these formal requirements, except for the Inventories and Financial Statements books, and the Book of Minutes of Shareholders and Directors Meetings. Under the Argentine Commercial Code, all merchants are required to prepare, within three months after the end of each fiscal year, a balance sheet and income statement, which must be transcribed into the Inventory and Financial Statements Book. The Business Associations Law contains provisions relating to financial reporting requirements to be included in the financial statements. In addition, the control agencies have specific regulations in this connection which complement the Business Associations Law. The financial statements of stock companies and foreign branches must include the report of an independent public accountant expressing his/her opinion on whether the financial statements taken as a whole present fairly the financial position and the results of operations (and, as the case may be, the changes in working capital or cash flows) in accordance with generally accepted accounting principles in Argentina.

3.4. Oversight Agencies

The most significant aspects of the controls by legal authorities are described below: Inspeccin General de Justicia (IGJ) This is the agency through which the Argentine Government exercises control over certain business organizations domiciled in Argentina (publicly or closely held corporations and Branches of Foreign Corporations, savings and loan associations, civil associations and foundations). There is an IGJ in every jurisdiction. In the Federal Capital, the IGJ keeps the Public Register of Commerce. The IGJ is empowered to examine books and records, request whatever information and documents it may deem necessary, attend meetings and file charges with administrative authorities and courts of law.

BUSINESS PRESENCE

Control is permanent over stock corporations that: a) b) c) d) e) f) Make public offerings of their stock or bonds. (*) Have a capital exceeding ARS 2,100,000 (approximately USD 2.1 million) (this figure is adjusted periodically). Engage in managing investments or savings or obtain money or securities from the public against promises of future consideration or benefit. Exploit concessions of public utilities. Are mixed companies (capital held by the government and private shareholders) in which the government is the majority shareholder. Are Parent Companies or Subsidiaries of another company subject to control by virtue of any of the abovementioned points. In the city of Buenos Aires, control over publicly-held corporations is officially exercised by the Argentine National Securities Commission (Comisin Nacional de Valores). See point 2.5.1. (The Capital Markets).

(*)

National Securities Commission The National Securities Commission (CNV) is the regulatory agency that authorizes and controls corporations that wish to make a public offering of their shares or bonds. See point 2.5.1. (Capital Markets). Other There are other specific control agencies who have oversight powers by virtue of the business that is carried on by the corporation, such as the Central Bank of the Argentine Republic that governs financial and banking operations, the Superintendence of Pension Fund Managers that oversees pension fund managers, and the Superintendence of Workers Compensation Insurance Companies that controls workers compensation insurance companies.

3.5.

Fiscal year, financial reporting and accounting and auditing standards

3.5.1. Financial Reporting

Stock and limited liability companies, whose capital exceeds ARS 2,100,000 are required by law to prepare annual financial statements (balance sheet, statement of income, changes in shareholders equity and cash flows, or changes in working capital if the company is organized under any of the business association forms provided in Section 299 of Law No, 19,550), and supplementary information, In addition, parent companies must present consolidated financial statements as supplementary information to their individual financial statements, The basic accounting and reporting standards are specifically defined and governed by statutory provisions. The organization, operation and winding-up of business associations is mainly governed by Law No, 19,550 (Argentine Business Associations Law) and the regulations issued by the various control entities.

BUSINESS PRESENCE

The two fundamental requirements are as follows: The duty to file annual audited financial statements (external audit). Corporations and partnerships limited by shares without a surveillance committee and included in Section 299 (as described in Chapter VI of the Business Associations Law) must have a Sndico (individual statutory auditor) or, as the case may be, a statutory audit committee. This role is exercised by accountants and /or lawyers (Section 284 of the Business Associations Law) Publicly-held companies, banks and their related companies (parent and subsidiaries) must have a Statutory Audit Committee.

The following regulatory agencies require the presentation to financial statements together with an external auditors report issued by a certified public accountant in accordance with generally accepted auditing standards and the statutory auditors report, if applicable.
Regulatory agency Comisin Nacional de Valores CNV (National Securities Comisin) Banco Central de la Repblica Argentina BCRA (Central Bank of the Argentine Republic) Superintendencia de Seguros de la Nacin SSN (Insurance Superintendency) Superintendencia de Administradoras de Fondos de Jubilaciones y Pensiones SAFJP (Pension Fund Managers (AFJP) Superintendency) Superintendencia de Riesgos del Trabajo SRT (Superintendency of Workers Compensation Insurance Companies) Inspeccin General de Justicia IGJ - (and similar provincial authorities), governmental regulatory agency of corporations Main types of companies controlled Corporations making public offering of securities Financial institutions Insurance companies Pension Fund Managers (AFJPs)

Workers Compensation Insurance Companies Stock corporations, civil associations and foundations

The due dates for filing the annual financial statements and the Directors Annual Report vary according to the regulatory agency involved. These terms as from the fiscal year-end date are as follows:
Type of Company Publicly-held corporations Financial entities Insurance companies Pension fund managers Workers compensation insurance companies Foreign branches Stock companies subject to the Argentine governmental regulatory agency of corporations (IGJ): As defined in Section 299 of Law No. 19,550 Other companies 70 days 20th day of the following month 60 days 55 days 60 days 60 business days Term for filing annual financial statements

15 business days prior to the Shareholders Meeting (2) 15 business days subsequent to the Shareholders Meeting (2) 15 business days prior to the Owners Meeting (2)

Civil associations and foundations (2)

Such meeting is required to be called within four months of the fiscal year-end.

BUSINESS PRESENCE

All publicly-held corporations must file quarterly financial statements and a summary of events by the Board of Directors, which are published in the bulletin of the securities exchange where their stock is traded (usually, the Buenos Aires Stock Exchange). This information has to be filed within 42 days of the period-end. In addition, their subsidiaries and affiliates are to file quarterly financial statements within the same 42day term of the period-end. Financial institutions, insurance companies, pension fund managers, and workers compensation insurance companies must file quarterly financial statements with their appropriate regulatory agencies, The terms for filing as from the fiscal period-end are as follows:
Term for filing quarterly financial statements

Type of Company Financial institutions Insurance companies Pension fund managers Workers compensation insurance companies

20th day of the following month

60 days 55 days 60 days

In every case, the quarterly financial statements and the informative summary must be accompanied by a limited review report issued by a certified public accountant in accordance with generally accepted auditing standards, except for pension fund managers whose financial statements must be audited by an external auditor. According to legal regulations and the provisions of the related regulatory agencies, the financial statements should account for the effects of the changes in the currency purchasing power comprehensively, by applying the constant currency restatement method established by Technical Resolution No. 6 of the F.A.C.P.C.E. (Argentine Federation of Professional Councils of Economic Sciences), for which purpose the I.P.I.M. (Domestic Wholesale Price Index), published by the I.N.D.E.C. (Federal Institute of Statistics and Census) should be used. From September 1, 1995, through December 31, 2001, the companies discontinued applying the method due to the low inflation rates, which, throughout that period, resulted in an inflation of nearly 6%, as measured in I.P.I.M. terms. As there is a new inflationary context, the method was reinstated effective January 1, 2002, considering the accounting measurements prior to that date stated in December 31, 2001, currency. Dividends may only be distributed based on liquid and realized profits arising from financial statements for the fiscal year-end, prepared in compliance with statutory provisions and the companys bylaws. Only companies included in Section 299 of the Business Associations law may distribute dividends in advance or on a provisional basis based on special-purpose financial statements, and for which the directors and members of the statutory auditor committee will be held unlimitedly and severally liable.

BUSINESS PRESENCE

Stock corporations and limited liability companies (with certain characteristics depending on the capital amount) are required to comply with IGJ GR 25/04, which became effective as from December 22, 2004. This resolution requires: (a) the capitalization of capital adjustments prior to effective capital increases; and (b) the distribution of unappropriated retained earnings. In addition, requirements were established for booking irrevocable capital contributions on account of future share subscriptions in addition to those established in professional accounting standards, primarily that they should be paid up in cash and they should be capitalized in a term not exceeding 180 days as from the date of the agreement executed between the company and the contributor. Regarding the treatment to be given to the abovementioned unappropriated retained earnings, the Shareholders Meetings to be held after the effective date of IGJ GR 25/04, whereat the shareholders should discuss the annual financial statements, shall decide on the appropriation of unappropriated retained earnings, after setting aside any applicable legal and/or statutory reserves, to an optional reserve, the distribution of dividends in cash or in shares or a combination of those possibilities. In no case shall the Shareholders' Meeting decide to keep any amount in unappropriated retained earnings. If unappropriated retained earnings are appropriated to a reserve, it should be considered that section 70, Law No. 19,550 establishes that setting optional reserves when they exceed the capital amount and legal reserves should be decided with the majority required by the last paragraph of section 244, Law No. 19,550 (special cases), i.e. with the favorable vote of the majority of voting shares and the plurality of votes is not applicable (i.e. majority of possible votes, rather than of votes present).

3.5.2. Professional standards

General aspects
Argentina is a federation of 23 provinces and the City of Buenos Aires, its capital city and also an autonomous jurisdiction akin to a province. Each one of these jurisdictions has a professional council in economic sciences in charge of issuing professional accounting (generally accepted accounting principles) and auditing standards. The standards issued by each council are only binding for the professionals registered in the related jurisdiction. Except for the City of Buenos Aires, all Argentine professional councils are currently members of the FACPCE (Argentine Federation of Professional Councils in Economic Sciences), which is in charge of coordinating efforts to issue professional accounting and auditing standards. To prepare the standards proposals, the FACPCE has the CECYT (scientific and technical studies center) and the CENCYA (special committee for accounting and auditing standards). The procedure to issue standards is:

BUSINESS PRESENCE

a)

The CENCYA prepares proposed accounting and auditing standards, which, once approved by the FACPCEs governing board, are published with a deadline (inquiry period) to receive opinions from professional councils, government control entities, business associations, graduates in economic sciences, among others interested in this issue. After the inquiry period has elapsed and the changes approved have been included, the projects become technical resolutions that need to be approved by the related professional councils to be effective in each jurisdiction.

b)

In 1998, the FACPCEs governing board decided to implement a plan to adapt Argentine professional accounting standards to the International Accounting Standards proposed by the International Accounting Standards Committee (currently International Accounting Standard Board). Such plan included:
a)

defining a general framework for Argentine professional accounting standards including an accounting model consistent with the IAS, and adopting benchmarks or acceptable alternatives contained in certain IAS selected for the first stage of the harmonization plan to the extent that they do not generate significant inconsistencies with the general framework.

b)

After a process that took about three years, on December 8, 2000, the FACPCEs governing board approved Technical Resolutions Nos. 16 through 19, thus completing the first stage of the harmonization plan, which continued with the issuance of new technical resolutions. The technical resolutions issued until December 31, 2003, that remain effective are: Technical resolution No. 4 5 6 7 8 9

Issue Financial statements consolidation. (5) Valuation of ownership interests in subsidiaries and affiliates. (5) Financial statements in constant pesos. Auditing standards. General accounting disclosure standards. Specific standards for the accounting disclosure of commercial, industrial and service companies.

BUSINESS PRESENCE

Technical resolution No. 11 14 15

Issue Specific accounting disclosure standards for non-profit institutions. Accounting information regarding the participation in joint ventures. Standards on the performance of CPAs as statutory auditors (sndicos). General framework for professional accounting standards. (1) Professional accounting standards: exposition of generally applicable issues. (1) (3) Professional accounting standards: exposition of certain issues applicable in particular cases: (1)(2) (3) Amendments to technical resolutions Nos. 4, 5, 6, 8, 9, 11 and 14. (1) Derivatives and hedging transactions. (4) Equity value. Financial statements consolidation. Information to be disclosed about related parties. (5)

16 17

18

19 20 21

(1) These technical resolutions were issued in 2000 and they are the results of the process of harmonizing with the IAS, which began in 1998. The IAS considered were # 7, 12, 14, 15, 16, 17, 21, 22, 23, 31, 32, 33, 34, 35, 36, 37, 38 and 40. These technical resolutions were adopted by all Argentine professional accounting councils although they have different effective effective terms (depending on the jurisdiction the effective term is for the fiscal years beginning as from January 1, 2002; July 1, 2002; or January 1, 2003). In the City of Buenos Aires, the binding effective term is for fiscal years beginning as from July 1, 2002. (2) It derives from Technical Resolution No. 17 and includes special aspects. The issues analyzed are: financial statements translation, goodwill, leases, reorganizations, business combinations and spin-off. It also includes standards on the information to be presented broken down by business segments and earnings per common share, but these are only required for the companies with listed stock and securities. (3) These technical resolutions include an appendix for small entities, for which certain exemptions are established, which mainly consist in permission not to apply certain financial statements disclosure requirements. (4) It introduces changes in the section related to Technical Resolution No. 18 as a result of introducing the main contents of IAS 39. It is effective for fiscal years beginning as from January 1, 2003. (5) Technical Resolution No. 21 replaces Technical Resolutions Nos. 4 and 5 for the fiscal years beginning as from April 1, 2003, admitting its early application, and it incorporates the main contents of IAS 24, 27 and 28.

BUSINESS PRESENCE

The FACPCE follows the IASBs activity closely and continues to examine its resolutions to determine whether the process to harmonize Argentine accounting standards with the international standards requires the adoption of new measures. As of December 31, 2003, the following professional accounting standard projects have been approved, are currently subject to the inquiry period, and should become technical resolutions during 2004:

a) Agricultural activity, based on IAS 41. b) Benefits to employees after the employment-relationship termination and other long-term benefits, based on IAS 19.

Provisional standards to implement the new technical standards and deferments in the application of certain methods.
The new technical resolutions 16 through 19 include special transitional standards to facilitate the implementation of the changes in accounting methods as from the first fiscal year of their application (mostly for year-ends as of December 31, 2003). Such transitional standards refer to the implementation of the following changes: a) Comparing with recoverable values (comparison levels, cash flow estimates, etc.): the beginning balances of the first year in which the new regulation is applied will not be corrected. Ban on applying market values to assets not intended to be sold and treatment given to the residual effects of the increase in accounting measurements of property & equipment and similar assets deriving from pre-existing revaluations: the revaluations will not be excluded from the accounting measurements of such assets and the revaluation balances carried in shareholders equity will be reduced to the extent that the assets originally revalued are consumed, sold, retired or impaired in value. Conditions to carry an intangible asset: whenever a previously recognized asset is not allowed to be carried, it may be amortized within the prior remaining useful life or five years, whichever shorter. Requirements to reduce the useful life assigned to an intangible asset, including goodwill: should the new useful life be equal to or under five years, the asset may be amortized in its prior remaining useful life or five years, whichever shorter. Rules for translating the financial statements of foreign companies into Argentine pesos for consolidation purposes or to apply the equity method: whenever the use of historical exchange rates is to be discontinued and current exchange rates are to be used from then on, the accumulated effect of this change at the beginning of the first fiscal year of application will represent the initial amount of a special shareholders equity item to which foreign exchange differences resulting from the translation are to be allocated. Whenever historical exchange rates are applicable instead of the current exchange rates, the translated amounts of non-monetary items at the beginning of the first year of their application will be deemed the historical costs of such items.

b)

c)

d)

e)

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f)

Determination of liabilities deriving from post-employment benefits: the unbooked liabilities related to the accumulated effect of the new regulation at the beginning of the first fiscal year of application may be booked during the remaining labor relationship of the employees entitled to the benefits. Introducing alternatives to capitalize financial costs: the beginning balances of the first fiscal year in which the new regulation is applied will not be corrected. Introducing standards on business combinations: they will not be applied to the combinations prior to the first fiscal year in which such standards are applied. Defining methods to determine a goodwill and its useful life: the positive and negative goodwill balances at the beginning of the first fiscal year in which the new regulation is applied will not be corrected. Defining methods to determine and book financing and operating leases: they will not be applied to any lease agreements that began to be performed prior to the first fiscal year in which the new regulation is applied.

g)

h)

i)

j)

In addition, all jurisdictions, except for the City of Buenos Aires, granted exemptions, which consist in deferring the application of the more complex standards for one year, such as: Deferred tax. Comparative information when the entity did not present it before. Comparative information in the new statement of cash flows. Information by segments.

Subsequently, FACPCE Resolution No. 282/03, which is not applicable in the City of Buenos Aires, extended the option not to apply the deferred tax method to the first three fiscal years of effectiveness of Technical Resolution No. 17, and established certain additional exemptions regarding the segregation of imputed financial components in commercial transactions and the use of discounted values to state monetary assets and liabilities (other than loans and not related to trade) in the two first fiscal years in which Technical Resolution No. 17 is in effect.

Accounting model
The accounting model set forth in the new technical resolutions addressing financial statements preparation is based on the following cornerstones:

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a)

Measurement unit During inflationary or deflationary periods, financial statements are required to be stated in constant Argentine pesos, i.e. with the currency purchasing power of their dates of issuance. The entities in charge of issuing the professional accounting standards have established that conditions in Argentina are stable since October 1, 2003. Therefore, they stated that financial statements are not to include the effects of the variations in the currency purchasing power occurred as from such date. Whenever the restatement process is interrupted and reinstated, the inflationary or deflationary effects during to the interruption period will be disregarded.

b)

Valuation methods Assets will be valued taking into account their most probable use. The assets intended to be sold or realized early will be stated at market values while those intended to be used will be valued at historical cost, net of depreciation or amortization, as the case may be. Any ownership interests in other companies in which a significant control or influence is exercised are to be valued by the equity method. Receivables and payables valuation is characterized by:

Should a receivable or payable not accrue any interest or have an interest rate significantly lower than market rates, it will be initially valued based on the best possible estimate of the amount to be collected or paid, discounted by using a rate showing market evaluations regarding the time value of money and the specific risks of the asset or the transaction. For subsequent valuations, the same initial valuation rate will be maintained. For contingencies and pension plans, a new measurement is required to be made at each financial statements closing. Thus, it is necessary to use a discount rate reflecting market conditions at the time of measurement.

c)

Capital to be preserved In determining income or loss for each period, it is necessary to preserve the financial capital (that invested in Argentine pesos, restated, if applicable, for the variations in the currency purchasing power).

Issues specifically applicable in the City of Buenos Aires

The CPCECABA (Professional Council in Economic Sciences of the City of Buenos Aires) is the most important Argentine council in terms of the number of registered professionals, and most large Argentine companies have their head offices located in its jurisdiction. As previously indicated, this council does not form part of the FACPCE, but it has adopted its technical resolutions with the following characteristics:

It modified some significant aspects and introduced certain issues not addressed by such resolutions.

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It replaced Appendix A regarding small-sized enterprises for specific exemptions for the companies not included in section 299, Argentine Business Associations Law (those not subject to permanent government control). It established that in the event of measurement issues that are not set forth in the technical resolutions and may not be resolved by applying the concepts contained in the general framework of Technical Resolution No. 16, general international standards shall be applied, especially taking into account the market and regulations applicable to the entity issuing the financial statements. The application of these standards shall be disclosed in detail in a note to the financial statements.

On July 18, 2003, the CPCECABA issued Resolution C.D. 87/03, which approved the revised text of the technical resolutions effective in its jurisdiction. The main changes introduced by the CPCECABA to FACPCE technical resolutions are: a) In the case of goods with long production or construction processes, it eliminates the alternative of charging the financial costs deriving from third parties capital directly to expenses, which is preferred by FACPCE Technical Resolution No. 17, and instead requires capitalization. For the same type of goods indicated in point (a) above, it admits capitalizing financial costs from ones own capital, after considering all the costs deriving from third parties capital. In the case of large infrastructure works under the concession system with regulated rates (toll freeways, etc.) and financed basically with debt, CPCECABA allows capitalization of third parties financial cost accrued after the work is fully or partially put into operation, to the extent that the concession business plan includes the recovery of such financial costs in the rates of future fiscal years (in addition to the costs previously incurred) and that the regulatory agency maintains the rate structure allowing such recovery. Regarding intangible assets - excluding goodwill - used to produce or sell goods and services or not generating their own cash flows, the fact that a useful life exceeding twenty years has been assigned is not in itself reason enough to require an annual recoverability test. When, due to indications of impairment in value, it is necessary to compare the book value of an asset and its value in use, the first comparison will be made against the undiscounted value in use and, should it be higher, it will not be necessary to continue with the analysis. Should such first comparison show that the undiscounted value in use is higher than the net realization value of the assets and lower than their book value, booking an impairment in value is required, and to determine the value thereof a second comparison shall be made with the discounted value in use. Under the original FACPCE technical resolution No. 17, the first comparison is made based on discounted values.

b)

c)

d)

e)

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f)

Regarding property & equipment and intangible assets used to sell or produce goods and services or not generating their own cash flows, it eliminates the requirement of comparing with the recoverable value on an individual-asset basis and it also establishes that such comparison should be made for each "activity generating cash" (business segment, etc.), which is a broader term than the "minimum cash-generating unit" provided in FACPCE Technical Resolution No. 17. Non-amortization of positive goodwill and other intangible assets is allowed when there are no factors limiting their useful life. Whereas, FACPCE Technical Resolution No. 17 presumes, admitting rebutting evidence, a maximum twentyyear useful life as from the original booking. It maintains the requirement under the original Technical Resolution No. 17 (which was eliminated in all other Argentine jurisdictions) to discount deferred tax assets and liabilities by applying a rate reflecting markets conditions at the time of measurement. Such discount is not admitted by CNV (Argentine Securities Commission) regulations, which are applicable to companies listing shares and other securities. The foreign exchange differences deriving from the translation of financial statements of non-integrated entities will not be disclosed in shareholders equity, as required by FACPCE Technical Resolution No. 18, but in a special section between liabilities and shareholders equity called "Temporary translation differences". The same treatment will be given to (a) the foreign exchange differences booked by the Argentine investor as a result of a monetary item that substantially forms part of the net investment in a foreign entity and (b) income (loss) deriving from liabilities assumed to cover such net investment unless they had been generated by a derivative instrument that turned out to be an ineffective hedge. The changes in the accounting measurement of derivatives that have been determined as an effective hedge for cash flow risks will not be disclosed in shareholders equity, as required by FACPCE Technical Resolution No. 18, but in a special section between liabilities and shareholders equity called "Temporary valuation differences regarding derivatives determined as an effective hedge ". The submission of a statement of cash flows and comparative information is only required for companies subject to permanent government control included under section 299, Argentine Business Associations Law. To determine the capital amount necessary to qualify as a company under such section (ARS 2,100,000), the CPCECABA established that all owners contributions should be computed (subscribed capital, irrevocable contributions, issuance premiums) adjusted for the variations in the currency purchasing power, if applicable.

g)

h)

i)

j)

k)

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Differences between the technical resolutions issued as of December 31, 2003 (including Technical Resolution No. 21, effective for fiscal years beginning as from April 1, 2003), and IAS (excluding the amendments introduced in such standards in December 2003, effective for the fiscal years beginning as from January 1, 2005).
The comparison between the standards set forth in the technical resolutions and those contained in the IAS, selected in the harmonization plan, shows certain differences as to measurement and disclosure. The chart below includes the main differences in valuation methods applicable as of financial statements closing date. a) Main differences between the IAS and accounting standards approved in all Argentine jurisdictions (including the City of Buenos Aires).

Issue Adjustment to show the effects of the change in the currency purchasing power.

IAS Required for financial statements issued in a hyperinflationary currency.

Technical resolutions Required for financial statements issued in hyperinflationary, inflationary or deflationary currencies. The adjustment is not admitted within a stability context, which will be defined by the entities issuing the accounting standards. Generally, replacement costs are applied.

Non-fungible inventories or those without a transparent trading market. Deferred taxes on P&E revaluations (without tax effect).

Generally, the historical cost is applied.

They are recognized and deducted from an account in shareholders equity. Not admitted.

Not recognized.

Deduction of selling expenses in determining market values of monetary assets, P&E and investments in goods of a similar nature to be sold. Booking the financial effects of unfavorable contingencies.

It is required.

When the occurrence of such events is deemed more probable than not (i.e. 51% and 49%, respectively).

When the probability of occurrence of the events and their financial effects is high (occurrence probability significantly exceeding 50%).

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Issue Intangible assets

IAS Start-up expenses (organizational and preoperating) are not deemed intangible assets.

Technical resolutions Intangible assets may include organizational and preoperating costs (provided they are directly related to a new activity and incremental and not required to be included as a component of P&E cost). Such assets are required to be amortized within five years. Any of these two methods may be selected: (a) the same method established by the IAS for these types of companies, except that an hyperinflationary context is not a requirement to make the previous adjustment in the currency as of year-end. The existence of inflation or deflation makes such adjustment obligatory. (b) the method established by IAS for foreign companies that are not an integral part of the reporting companys operations, which is to say by using (i) the foreign exchange rate as of year-end for monetary items and nonmonetary items booked at fair value and (ii) the foreign exchange rates as of the transaction date for nonmonetary entries booked at historical cost. The amounts translated into local currency are required to be adjusted to the currency as of year-end, when the standards on the restatement in constant currency are applicable.

Translation method for non-integrated foreign companies.

Should the economy of the foreign company be hyperinflationary, before the conversion it is required to adjust the financial-statement figures to the currency as of year-end. The translation into local currency is to be made (i) for assets and liabilities, applying the foreign exchange rate as of year-end, and (ii) for revenues and expenses, at the foreign exchange rate effective on the transaction date, or as of year-end should the economy be hyperinflationary.

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In some cases where the IAS allow alternative accounting methods, the new technical resolutions have selected a particular method, such as: a) Appraisal revaluations of P&E and intangible assets are not permitted, unlike in IAS 16 and 40. The investments in real property intended to be leased are not allowed to be measured at market value, but this is permitted by IAS 40. When there is a functioning market for such assets, investments in real property intended for sale are not permitted to be valued by the cost method, unlike in IAS 40. For financial assets available for sale (those not traded on a habitual basis and not expected to be kept until maturity), income or losses deriving from measuring at market values are directly charged to income. Whereas, IAS 39 admits booking a special item in shareholders equity until the financial asset is divested, whereupon the special item is charged to income for the period.

b)

c)

d)

b) Additional differences between the IAS and the standards applicable only in the City of Buenos Aires Technical resolutions approved in the City of Buenos Aires

Issue Deferred tax assets and liabilities. (a) Measurement. (b) Treatment given to the differences deriving from non-monetary assets and liabilities when they are restated in books at the currency as of yearend to show inflationary or deflationary effects, and kept at nominal values for tax purposes. Measuring contingent liabilities.

IAS

They are not discounted. They are deemed temporary differences.

They are discounted. They are deemed permanent differences.

Should the financial effect be significant, contingencies will be required to be measured at the discounted value of the amounts expected to be paid.

When the entity issuing the accounting standards establishes that the country is in a stability context, discounting of the amounts expected to be paid within twelve months as from the date of financial statements is optional.

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Issue Booking the foreign exchange differences arising from: (a) the translation of nonintegrated foreign companies; (b) monetary items of the investor that substantially form part of the net investment in a foreign company. (c) liabilities assumed to cover the net investment in a foreign company (unless they originated in a derivative that turned out to be an ineffective hedge). Recoverable value of P&E and intangible assets used to produce or sell goods and services or not generating their own cash flows: (a) Frequency of comparison with the recoverable value.

IAS They are booked in a special shareholders equity account.

Technical resolutions approved in the City of Buenos Aires They are booked in an intermediate item between liabilities and shareholders equity.

The comparison will be required (a) when there are signs that the asset value may have been impaired or (b) every year in the case of intangible assets and goodwill amortized in a period exceeding 20 years. The comparison is required to be made asset by asset or, if not possible, based on the minimum cashgenerating unit.

The intangible assets (except for the goodwill) amortized over a period longer than 20 years are not required to be subject to an annual recoverability test.

(b) Comparison level.

An asset-by-asset comparison is not required and it is permissible to classify by cash generating activity (business segment, etc.), which may contain more than one cashgenerating unit or comprise all the assets.

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Issue (c) Booking an impairment in value.

IAS An impairment in value is booked for any excess in the book value of assets over their recoverable value, which is defined as the higher of the net realization value of assets and the discounted value-in-use thereof (present value of future net cash flows expected to be earned by using the goods).

Technical resolutions approved in the City of Buenos Aires A first comparison is made between the net realization value and the discounted value in use. Should any of these values exceed the book value of the related assets, it will not be necessary to compute any impairment in value. Should the first comparison find that the undiscounted value in use exceeds the net realization value and is lower than the book value of the related assets, an impairment in value computation is required. However, to determine the amount thereof, a second comparison will be made after discounting the value in use.

Capitalization of third parties financial costs in goods with long construction or production processes fulfilling certain conditions: (a) Capitalization, optional or mandatory. The treatment preferred ("benchmark") is to book financial costs as expenses for the period in which they are incurred while the acceptable alternative is to capitalize financial costs. They are required to be deducted from capitalizable financial costs. The capitalization is mandatory up to the limit of the recoverable value of the related assets.

(b) Treatment to be given to the revenues deriving from the temporary investment of funds earmarked for financing the project.

They are not deducted from capitalizable financial costs.

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Issue Capitalizing the financial cost of own capital in goods with long construction or production processes. Large infrastructure works under the concession and regulated rate system Capitalizing third parties financial costs after the work is declared fit for use and during the use thereof.

IAS The capitalization of own capital costs is not admitted.

Technical resolutions approved in the City of Buenos Aires It is optional to capitalize own capital costs if all financial costs from third parties capital have been previously capitalized. The capitalization is optional, but it requires that: (a) the concession business plan comprise the recovery of financial costs and prior costs from rates of future fiscal years, and (b) the regulatory agency maintain a rate structure allowing such recovery.

The capitalization of third parties financial costs is not admitted once the work is fit for use and working.

Intangible assets useful life, including goodwill.

It is presumed, admitting rebutting evidence, that the useful life does not exceed twenty years counted from when the asset was originally booked.

An indefinite useful life may be assigned to intangible assets as long as no evidence contradicts such decision. Should this option not be used, it will be necessary to estimate the useful life, which, in the case of positive goodwill, is presumed, admitting rebutting evidence, not to exceed twenty years as from its original booking

3.5.3. Legal standards

Legal standards concerning accounting matters may only be issued by the Federal and the Provincial Governments that are entitled to set them by law or decree or by resolutions of governmental agencies to which special legislative powers have been delegated in the particular subject. The following Federal Government agencies are empowered to issue legal standards concerning accounting matters:

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Comisin Nacional de Valores CNV (National Securities commission), a regulatory agency whose jurisdictions includes:

a) corporations making public offerings of securities. b) certain entities linked to the public offering of securities system: stock exchanges, securities markets, over-the-counter market brokers, mutual funds and depository institutions of securities, etc. Banco Central de la Repblica Argentina BCRA (Central Bank of the Argentine Republic) that has the duty to audit the following entities: banks, finance companies, savings and loan associations for home building and other real property, and mutual credit associations. Superintendencia de Seguros de la Nacin - S.S.N. (National Insurance Superintendency) whose jurisdiction includes entities engaged in insurance transactions or transactions assailable thereto. Superintendencia de Administradoras de Fondos de Jubilaciones y Pensiones SAFJP (Superintendency of Pension Fund Managers), which controls pension fund managers. Superintendencia de Riesgos del Trabajo SRT (Superintendency of Workers Compensation Insurance Companies), which controls workers compensation insurance companies. National Institute for Cooperative and Mutual Action, which audits cooperatives and mutual associations. National Social Services Institute, which controls health plans and the like. Inspeccin General de Justicia which oversees:

a) Corporations (except those controlled by the CNV), foreign branches, civil associations and foundations domiciled in the Buenos Aires city. b) Corporations engaged in capitalization and savings transactions, whatever their domicile. The provincial regulatory authorities usually have names and functions similar to those of the Inspeccin General de Justicia". Some jurisdictions also have specific agencies to control cooperatives and/or mutual associations. Certain legal regulations may establish requirements that have to be considered when drawing up audit reports. These requirements may be divided into two groups: a) Those requiring that the auditors opinion on the financial statements considered as a whole not only refer to application of generally accepted accounting principles but to certain legal requirements covering accounting matters as well. b) Those requiring that the auditors report include information that does not constitute technical opinions on the application of specific accounting standards.

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With regard to standards concerning the performance of the auditors work, the regulatory agencies that have dealt with this matter are the BCRA (Central Bank of the Argentine Republic), the S.S.N. (National Insurance Superintendency) and the SART (Superintendency of Workers Compensation Insurance Companies), that have defined the minimum scope of external auditors work as well as a list of minimum audit procedures applicable to examining of annual and quarterly financial statements.

3.5.4. Auditing standards

The effective standards to perform audits and limited reviews of financial statements are included in F.A.C.P.C.E., Technical Resolution No. 7. These standards do not differ substantially, in basic respects, from International Auditing Standards issued by the International Federation of Accountants.

4. Foreign Investment

At present, foreign investment is governed by Law No, 21,382 (organized by Decree No, 1,853/93) which has been amended by Law No, 23,697 and 23,760. This legislation is based on the principle of equal treatment for both local and foreign capital invested in Argentina. The investment of foreign capital in Argentina does not require prior approval. Such investment can be made in or with: Readily convertible foreign currency Capital goods, their spare parts and accessories Income or capital denominated in Argentine currency due or belonging to foreign investors, provided that such income or capital are legally eligible to be transferred abroad. Conversion into equity of foreign receivables denominated in readily convertible foreign currency. Intangible assets, in accordance with specific legislation Other forms of contribution contemplated in special or promotional regulatory systems.

Foreign investors are allowed to transfer abroad their liquid and realized income; they are also allowed to repatriate their investment. Foreign investors are allowed to organize their business entities under any juristic form contemplated in Argentine legislation. Foreign investors have access to domestic credit with the same rights and terms and conditions as locally-owned companies.

5.

Taxation

5.1. General description of the Tax System

Introduction In the Argentine tax system, taxes may be divided into three categories: taxes, assessments and contributions. Assessments and contributions are normally lower in amount than taxes and are intended to compensate the State for some specific activity in the form of individualized service to the party called taxpayer. In contrast, taxes are payments exacted from the taxpayer irrespective of anything the State might or might not do for such party. As this guide is meant to be a brief summary, and as assessments and contributions are less important, we will confine our remarks to taxes only. Argentine Tax Structure The Argentine political organization, comprises federal, provincial and municipal governments. Federal level At the federal level, the DGI (Argentine tax bureau) is subordinate to the AFIP (Argentine Federal Public Revenue Agency), a self-governing agency within the Ministry of Economy and Production. The DGI is responsible for applying, collecting, and controlling taxes (except for customs duties). The main federal taxes are as follows: Income tax Value added tax Tax on Minimum Presumed Income Tax on bank account and other transactions Excise taxes Real Property transfer tax Tax on personal assets

Tax disputes may be taken to the following instances: a) Administrative: Argentine Tax Bureau (DGI) Administrative tax courts

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b)

Judicial: Federal administrative-contentious courts Appellate courts Supreme Court of Justice

Provincial level Provincial taxes are managed by the Revenue Office of each Province. These entities, in turn, are subordinated to the respective Provincial Ministries of Economy. The City of Buenos Aires has been recognized as self-governed city with its own institutions. Therefore, it applies certain taxes that are usually collected at provincial level. The main provincial taxes are as follows: a) b) c) Turnover tax Stamp tax Real property tax

Municipal level Under this heading, it is necessary to segregate the City of Buenos Aires from the other municipalities in view of its importance and for having been recognized as an autonomous city with its own government and institutions. In the City of Buenos Aires, the main tax levied on business is turnover tax (it will be commented on among the provincial taxes). The other municipalities derive their revenue from rates and assessments collected.

5.2. Direct Taxation

5.2.1. Income tax
Worldwide - Source Income Taxpayers resident in Argentina are required to pay income tax on their worldwide income; they may take a tax credit for similar taxes paid abroad on their foreign business activities, up to the limit of the increase in tax liability caused by including the foreign-source income. Nonresident taxpayers pay income tax only on their Argentine-source income. Income tax loss carryforwards arising from activities whose income is not considered of Argentine-source may only be deducted from taxable income derived from nonArgentine sources.

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In general, certain exceptions aside, Argentine-source income in the generated by: a) b) c) Goods located, placed or used for an economic purpose in Argentina. Performance, of any activity capable of producing an income in Argentina. Events occurring within Argentine territory.

Tax return requirements Residents assess their own income tax on an annual basis by means of an income tax return in which taxable income is determined according to the provisions of the relevant legislation. These returns are only signed by the taxpayer and need not be certified by a public accountant. In addition, companies are required to file a tax-purposes report certified by an independent CPA.

Income tax payment Income tax is paid to the Treasury as follows: Corporations: Ten prepayments Balance: five months after the closing date of the fiscal year

Individuals: Five prepayments Balance during April or May

For corporations, the taxable year is the same as their fiscal year; for individuals it is the calendar year. Income tax may also be paid by withholding. The withholding agents are usually corporations who make the withholdings when they pay other corporations or individuals for certain services, such as rent, commission, etc. Such withholdings are computed as prepayments against income tax in the annual income tax return of the party from whom they were made.

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Types of taxpayer

Stock corporations (SA), limited liability companies (SRL), limited liability partnerships (SCS), and limited liability partnerships by shares (SCA), among others considered for tax purposes as non-pass-through companies, are subject to a 35% tax on their taxable income. Branches of foreign business enterprises are taxed at 35% and file and pay themselves. All other companies calculate their income tax, but the partners or owners are the ones who include the taxable income in their own income tax returns in proportion to their interests, according to the scale referred to below. Individuals file and pay income tax, including the taxable income they obtain from the business enterprises mentioned in the preceding paragraph, on a progressive scale rising from 9% to 35%. Natural persons and companies organized abroad that do not reside in Argentina for tax purposes (foreign beneficiaries) and generating Argentine-source income pay income tax through withholdings tantamount to a single and definitive payment according to the rates indicated in the respective section.

Exemptions The most important exemption is related to the gains on the purchase or sale of shares of stock in Argentine Companies by foreign beneficiaries. Some exemptions related to interest on deposits with financial institutions, transactions with Argentine government securities, purchase of shares, among others, are applicable only to natural persons. Certain nonprofit associations engaged in activities established by law are also taxexempt.

Deductions The general principle established by law is that the expenses made to obtain, maintain and keep taxable income will be deductible, with the express restrictions contained in such law.

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a)

Corporations and the like Accruals and reserves Some accrued expenses are deductible for income tax. To qualify for deduction, the liability must be identifiable as a specific amount owed to a specific creditor. General allowances may not be deducted, except for the tax-purpose allowance for bad debts, with certain restrictions. No other allowance or provision is deductible.

b)

Taxes All taxes are deductible for income tax with the exception of income tax.

c)

Organization expenses Organization expenses involved in setting up a business may be deducted in the year in which they were incurred else or amortized over a period not exceeding five years.

d)

Donations Donations may be deducted when made directly to the (federal, provincial, or municipal) government , the FPP (permanent fund for political parties), religious or charity institutions, or exempt private organizations with specific goals. The deductible amount is limited to 5% of the donors income tax liability for the fiscal year.

e)

Foreign exchange Exchange gains or losses are included in the taxable income on an accrual basis, even if they arose on capital transactions. Foreign currency receivables and payables are to be restated at the exchange rate quoted by the Banco de la Nacin Argentina at the fiscal year-end concerned.

f)

Interest Interest expense and other financial expenses are deductible with the limitations explained in "Thin Capitalization Rules".

g)

Losses caused by accidents are deductible to the extent they are not compensated by insurance. In addition to the specific items discussed above, deductions are allowed for other expenses incurred in producing taxable income. For example, salaries, wages, commissions, director's fees, technical service fees, contributions to pension funds, and travelling expenses are deductible although limitations apply for certain items.

h)

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Individuals

Individual taxpayers may deduct from their income the following items in addition to the expenses necessary to obtain, maintain or keep taxable income. a) Membership fees of health care plans and fees for health, medical and paramedical assistance services (up to a certain amount). Life insurance premiums (up to a certain amount). Private retirement pension plan (up to a certain amount). Gifts (the features are similar to corporations). Mortgage loan interest (up to a certain cap).

b) c) d) e)

In addition to the above, a personal exemption may be deducted if the taxpayer resided in Argentina for at least six months in the tax year. There is also a special deduction applicable to certain income of the taxpayers. Also, certain deductions for dependents are also permitted, provided always that the dependent's net income, if any, does not exceed a specific limit and the dependent resides in Argentina for more than six months during the tax year concerned. These deductions include, for example, those taken for a spouse and children kept by the taxpayer. These deductions are subject to increasing restrictions for taxpayers with higher income. Inventory valuation Regulations establish inventory valuation methods according to the type of asset involved. However, if the market value is lower, following certain requirements, such value could be utilized for tax purposes. Depreciation Fixed assets are depreciated annually based on their years of useful life. There are no guidelines as to the depreciation percentages except that buildings must be depreciated at 2% per annum, although the Tax Bureau may accept a higher percentage if the taxpayer can prove that the building has a useful life shorter than fifty years. Automobiles depreciation and losses are deductible so long as they do not exceed the limits established by law. However, depreciation and losses of automobiles whose use is the main object of the activity subject to tax are fully deductible.

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Payments of dividends The dividends and earnings that stock companies and other non-pass-through companies distribute to their members, as well as the shares distributed for revaluations or book adjustments shall not be considered by the respective beneficiaries in the calculation of net income. Additionally, when an Argentine company pays dividends or distributes earnings exceeding income assessed by applying the general Income Tax Law provisions, accumulated as of the year-end immediately preceding the payment or distribution date, it is required to withhold 35% of such excess as single and definitive payment. To such end, income to be considered in each year shall be that assessed by applying the general provisions of Income Tax Law less income tax paid for the tax period(s) in which income being distributed originated, plus the dividends or earnings not computed upon assessing such income.

Loss carryforwards There are no carrybacks. Income tax loss carryforwards may be deducted from future taxable income in any of the five subsequent years. Losses resulting from divesting shares or interests in corporations may only be charged to income resulting from the same origin. The same applies to losses from activities not to be considered of Argentine source and from transactions under derivative agreements, except for hedging transactions.

Rates Tax rates applicable to resident taxpayers are as follows:

Stock corporations (SA), limited liability companies (SRL), limited liability partnerships (SCS), limited liability partnerships by shares (SCA), and other non-pass-through companies Branches Other business enterprises

35% 35% Partners report income proportional to their interests. 9% to 35%

Individuals

Nonresident corporations and individuals are taxed on their Argentine-source income, whatever form that income may take, at the following tax rates which result from the application of a 35% tax rate to a presumed income determined in the income tax law:

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Description 1. Technical assistance or consulting unavailable locally which result from agreements complying with Technology Transfer Law Assignment of rights or patent licenses, and any other technology transfer in accordance with Technology Transfer Law and not contemplated above. Author's royalties, under certain requirements Interest paid to financial institutions domiciled in jurisdictions not considered tax havens, or when the borrower is a financial institution. Interest in case of financing operations of imports of depreciable personal property, except automobiles, granted by vendor. Other interest payable. Interest on deposits made with financial institutions (Law No. 21,526), resulting from savings account, special savings account, CDs, or deposits made by third parties or other forms of procurement of funds from the public as provided for by the Central Bank of the Argentine Republic Salaries, fees, etc, to people working temporarily in Argentina (less than six months): artists, sportsmen, technicians Rentals of personal property

Presumed Income 60%

Effective Tax rate

21%

2.

80%

28%

3. 4.

35% 43%

12.25% 15.05%

5. 6. 7.

43% 100%

15.05% 35%

43%

15.05%

8. 9.

70% 40% 60% 50% 90%

24.5% 14% 21% 17.50% 31.50%

10. Real property leased by foreign companies 11. Sales of property located in Argentina 12. Other income not specifically mentioned above

The tax is to be withheld by the paying agent in the Argentine Republic. Dividends are not subject to any withholding, except that they exceed the income assessed by applying General Income-Tax Law provisions, in which case the withholding system explained in "Payments of dividends" is applicable. Parent companies 1. Resident related companies Each company is considered a separate taxpayer. There is no tax consolidation concept. 2. Nonresident related companies Transactions made with related parties (the definition of related is broad) as well as those with entities established in low-taxation countries must be made on an arms length basis. To verify this, Transfer Pricing studies following the OECD guidelines must be made.

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The taxpayers obliged to file sworn statements with the transfer prices are those that: make transactions with companies abroad who participate in their capital, control or management either directly or indirectly, make transactions with foreign companies whose shareholders (companies) also hold shares in the local company either directly or indirectly make transactions with companies with which they have economic links in some of the ways defined by the regulations, make transactions with companies established in jurisdictions with zero or low taxation, even when there is no economic relationship with such companies.

Applicable regulations establish that the economic relation becomes effective in the following cases, among others: Where a person transfers to another person ownership over technology or technical knowledge which are a core element of the business conducted; Where a person develops an important activity only in connection with another person or if its existence is only based on the relationship with another person, giving rise to sole-vendor or sole-client relationships, among others; Where a person provides substantially all the funds required for the development of commercial activities by another person by granting loans or any type of security if financing was provided by third parties; Where a person bears the losses or expenses of another person.

In the case of exports to related parties involving grains, oilseeds, other products of the land, oil & gas and their derivatives and, in general, goods with widely-known listed prices on transparent markets, in which an international intermediary, other than the effective merchandise recipient, is involved, a special method should be applied to assess Argentine-source income, with the specifications established in such rules. Furthermore, the persons who perform goods import or export transactions with other independent persons are also required to show that the prices fixed for such transactions meet the usual market practices, as long as they perform export and import transactions higher than ARS 1 million p.a. Taxpayers must file one semi-annual sworn statement and a supplementary annual sworn statement. Corporate reorganizations The companies that undergo a merger, combination, or split-off, or else are involved in a sale or transfer of assets within the same group of companies may benefit from a taxfree reorganization and may transfer certain tax benefits to the surviving company. Income generated by the reorganization will not be subject to income tax.

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However, all reorganizations must be reported to the Tax Bureau whose prior approval must be obtained in the case of a partial transfer of an entity's business. To obtain the transfer of the tax advantages, the surviving entities are required to carry on the nonsurviving entity's business for a period of not less than two years. Besides, the shareholders of the former companies must hold in the surviving or new company at least an 80% of the amounts they held in the former companies previous to the reorganization. This shareholding must be maintained for two years in order to keep the reorganization as tax-free. The tax advantages transferable to the surviving entities are as follows: a) Available accumulated loss carryforwards. For this benefit to apply, the abovementioned shareholding must have been held for the previous two years. b) Undepreciated balances from restatement or revaluation of fixed assets. c) Unused balances of tax relief or special deductions and deferred charges not yet deducted. d) Unused tax exemptions granted by certain governmental agencies, so long as the surviving company complies with the basic conditions on which the exemption was granted. For this benefit to apply, the abovementioned shareholding must have been held for the previous two years. e) The choice to continue with the method used by the predecessor company or to use a new method for valuing inventories, depreciate PP&E, allocate income and expenses, and tax-deductible reserves. In certain cases, the change in method requires prior DGI authorization. If business entities are afterwards sold within two years, the above tax advantages will not be available.

Thin Capitalization Rules In the case of interest on loans granted by foreign persons that control the local company, according to the applicable Transfer Pricing rules, the local company may not deduct any interest on the related payable as of year-end that is in excess of the amount represented by multiplying the Company's shareholders equity as of such date by two, except for cases where Argentine-source presumed income, according to rules on withholdings from foreign beneficiaries, equals 100%. In this respect, the administrative order clarified that the interest considered as fully Argentine-source income for the foreign beneficiary and subject to a 35% withholding upon payment falls under the abovementioned exception. Any interest not deductible shall be given the same treatment as provided for dividends.

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5.2.2. Tax on Minimum Presumed Income (TOMPI)

Tax on minimum presumed income is applicable in all the territory of Argentina, and it is determined on the basis of assets. Assets subject to tax in Argentina whose aggregate value is equal to or lower than ARS 200,000, are exempt from the TOMPI. If the value of assets exceeds the ARS 200,000 amount all taxed assets of the person subject to tax will become subject to tax. For minimum presumed income calculation purposes, the following will not be computed: The value of first-hand depreciable assets, except automobiles, in the year of acquisition or investment and in the subsequent year. The value of investments for constructing new buildings or improvements in the year in which the total or partial investment, as the case may be, is made, and in the year thereafter.

Subjects a) b) c) d) e) Companies domiciled in Argentina, Nonprofit associations and foundations domiciled in Argentina, Sole-proprietorships located in Argentina, Individuals, undivided estates, owners of rural real estate, Permanent establishments domiciled or, as the case may be, located in Argentina for or resulting from commercial, industrial, agricultural, forestry, and mining activities.

Rate TOMPI payable results from applying a 1% rate on the tax base.

TOMPI payment Eleven monthly prepayments Balance: fifth month after the closing date of the fiscal year

Income tax determined for the tax year in which TOMPI is paid may be computed as a TOMPI credit. If income tax credit were insufficient, and therefore TOMPI should have to be paid, the exceeding amount could be setoff against income tax for any of the ten subsequent years up to the amount of the excess of Income Tax over TOMPI for that following year.

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5.3. Indirect taxation

5.3.1. Value added tax
General Remarks: This tax is levied on: a) Sales of personal property located or placed within the Argentine territory. b) Construction and other contracts and services performed or rendered within the Argentine territory. c) Definitive imports of personal property. d) Services rendered abroad but given actual economic use in Argentine, when such service recipients are registered VAT payers for other taxable events. Who pays value added tax: As a general rule, the seller of goods or services is liable for paying VAT. The VAT amount, however, is added to the price of goods or services and may be computed as tax credit in the following stage if the related person is registered as VAT payer. Certain taxpayers (in general, natural persons) whose sales do not exceed a ceiling set annually by A.F.I.P. and provided that other requirements are met may choose joining the simplified system (single tax system for small taxpayers), which replaces the VAT and income tax payments by paying a monthly fixed amount. Credit and debit system: VAT charged by a company on sales or services is called a "VAT debit". VAT borne by a company on purchases of goods or services is called a "VAT credit". In general, an entity deducts its VAT credit from its VAT debit each month and files a tax return and pays the difference, if any. If in any given month credit exceeds debit, the difference may be carried forward and added to the credit of the following month. There is an important limitation to the VAT recoverability principle, namely, that VAT borne on the acquisition of goods or on the use of services which, in turn, the entity uses in operations not subject to VAT may not be deducted from VAT debits as a VAT credit. In other words, such VAT borne is not recoverable and, therefore, constitutes an additional cost or expense. VAT paid upon acquiring automobiles, services rendered by restaurants and hotels, etc, may not be computed as credit, with certain exceptions.

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Furthermore, it has been established that purchases by foreign tourists of goods subject to VAT produced in Argentina will receive reimbursement of the tax billed by the seller. Furthermore, services provided by hotels, hostels and similar establishments hired by foreign tourists in tourist centers located in provinces with international borders will also receive the VAT reimbursement.

Rates: The general VAT rate is 21%. These rates increase to 27% for the following services: Telecommunications. Supply of gas and electric power. Water supply, sewage disposal and drainage.

This differential rate is applied when such services are provided to premises not exclusively used for dwelling and the service recipient is a registered VAT payer or a small single taxpayer. The general rate is reduced to 10.5% for the following taxable events: a) Sale and import of live animals, meat and edible scraps of cattle and sheep; fruits, legumes and vegetables; bulk bee honey; grains - both cereals and oilseeds, excluding rice and dry legumes beans, peas and lentils; and cattle hides. b) Works, contracts for works and service provisions (cultivation, sowing and/or plantation activities, application of agrochemicals and fertilizers, harvesting, among others) related to obtaining certain goods referred to in the preceding paragraph. c) Interest and commissions on loans granted by financial institutions under certain conditions d) sales, preparation, manufacturing or construction, and final imports of capital assets. e) Sales, hiring and final import of newspapers, magazines and periodical publications (except for some cases which are exempt). f) Sale and import of works of art

g) Certain Health services. h) Passenger Transportation (more than 100km) i) Sale and import of works of art.

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Comments in connection with the applicability of VAT on certain specific transactions:

Imports

Definitive imports, whether recurrent or not, are subject to VAT. The importer must pay the VAT before the imported goods are withdrawn from Customs. VAT borne and paid as an importer may be credited against VAT charged as a seller. There is a VAT additional withholding system, which applies at the moment of the definitive import of the goods, usually at a 10% rate (5% in the case of capital assets subject to the reduced rate). The importation of items to be added to fixed assets in the nature of tools of trade is not subject to VAT additional withholdings. The additional withholding rate will be duplicated if the company does not obtain an Importers Data Validation Certificate. Importation of services

Local companies must pay VAT on services rendered by others from abroad and given economic use in Argentina. The VAT paid has to be computed as a tax credit in the following month (reverse charge method). Leases

Rentals of personal property, and leases of real property such as meeting rooms or premises used for conferences, parties and the like are subject to VAT. Leases of other real estate are exempt from VAT, if such assets are only destined to dwelling place, are rural property or if rental does not exceed AR$ 1,500 per month. Sales of real property

Sales of real property are only subject to VAT (excluding the value of the land) when they are made by: Construction companies who build on their own land for profit. When businesses subject to VAT transfer or retire buildings or other works that gave rise to a VAT credit within the last ten years. In this case the tax amount will be that VAT credit. Exports

Exports whether of goods or services, are VAT-exempt, but exporters may offset the tax they may have been billed for goods, services and leases effectively destined to them against any VAT they may be owing on other transactions subject to VAT. Should this offset result in a balance in the VAT payer's favor, such party may ask that the amount concerned be credited against any taxes the same party owes to the AFIP for other taxable transactions, be refunded or be transferred in favor of other taxpayers.

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Exemptions Among others, the following contracts and services will be VAT exempt: Books, leaflets and similar printed material and sale to the public of newspapers, magazines and periodic publications. Teaching (under certain requirements). Services rendered by employee benefit funds, subject to certain requirements. Personal services rendered as payroll employee. Certain staples (water, milk, bread) earmarked for certain purchaser categories. Real property lease, with the exceptions mentioned in the lease section Passenger transportation (less than 100 km)

5.3.2. Turnover tax

General considerations Turnover tax is a provincial tax charged by tax authorities in each of the 24 jurisdictions (i.e. the provinces and the city of Buenos Aires). Tax base This tax is applied on revenues from the usual activities carried out for profit in business, industry, the professions, contracts for work or services, etc, regardless of the result of such activities, the nature of the service provider or the place where the activities are performed.

Exemptions These are some of the exemptions that we may mention (they may vary according to the jurisdiction involved): Transactions with securities, certificates and other documents issued by the Federal Government, the provinces or municipalities. Transactions related to shares and dividends Publication of books, newspapers and magazines. Interest and/or indexation due to deposits with savings accounts, term deposits and checking accounts. Sale of real property (with some exceptions) Exports

Some provinces have exempted certain activities from turnover tax, such as primary production, production of goods, real estate construction, among others, under the commitment undertaken upon adhering to the Federal Pact for Employment, Production, and Growth.

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Rates Rates vary according to the jurisdiction and the related activity. The general rate (applicable to commerce and services) varies from 2.5% to 3.5%. The rate on production is usually 1.5%. There are increased differential rates for other activities (loans, commissions, etc.). Payment method In general, turnover tax is calculated and paid in monthly and taxpayers must file an annual turnover tax return. Multilateral compact The persons subject to turnover tax who perform activities in more than one province have to allocate the tax base among the respective jurisdictions pursuant to a compact executed among the jurisdictions.

5.3.3. Excise taxes

General remarks Excise taxes are levied on certain products at different rates and with different return and payment requirements. The tax is generally levied on the manufacturers or importers when they sell the product.

5.3.4. Customs duties

International and regional agreements Argentina is a member of the World Trade Organization, the ALADI (Latin American Integration Association) and the MERCOSUR (South America trade block). World Trade Organization Argentina, as member of the World Trade Organization, has adopted, among other basic principles, the GATT (General Agreement on Tariffs and Trade) value code, which establishes the value guidelines for imports of goods. ALADI (Latin American Integration Association) The ALADI is an intergovernmental agency that promotes the expansion of regional integration, to ensure its economic and social development and its ultimate goal is to establish a common market. Its twelve member countries are Argentina, Bolivia, Brazil, Chile, Colombia, Cuba, Ecuador, Mexico, Paraguay, Peru, Uruguay and Venezuela.

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Through Compacts signed among different member countries have established tariff preferences which are applied to products originating in member countries with respect to tariffs effective for third-party countries. MERCOSUR The MERCOSUR was created in 1991, by Argentina, Brazil, Uruguay and Paraguay after signing the Asuncin Treaty. The basic purpose of the Asuncin Treaty is to integrate the four member countries through the free circulation of goods, services and productive factors and establish a common external tariff. In such regard, the import of goods originating in any of the member countries will be subject to a 0% import duty.

Importation taxes
Importation duties In Argentina importation duties are calculated on the CIF (cost, insurance and freight) value of goods, valued under GATT value standards. This duty rate ranges from approximately 0% to 35%, according to the characteristics of the goods imported, whose identification, in order to verify the applicable tax rate, should be made by using Common MERCOSUR nomenclature tariffs. There may be minimum specific import duties, resulting from applying a fixed amount in US dollars by measurement unit (meters, pairs, kilograms, etc.) as minimum import duty. Specific import duties only apply to textile, apparel and shoe industry products. Statistical rate Import of goods shall be subject to the payment of a statistical rate, which is 0.5% of the CIF value of goods, with a USD 500 cap. Value-Added Tax See comment on imports in point 5.3.1. Income tax The definitive import of goods is subject to a 3% or 11% additional income tax withholding, depending on the allocation of the imported goods. The importation of items to be added to fixed assets in the nature of tools of trade is not subject to VAT additional withholdings.

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The amount of additional income tax withholdings made shall constitute an advance tax payment for registered taxpayers and shall be computed by the latter in the tax return for the respective annual tax period. Turnover Tax The definitive importation of certain goods is subject to a Turnover Tax collection at source of 1%. Imports of assets that qualify as P&E for the importer are not subject to additional withholdings. The amount thus paid is considered as a prepayment made by the importer.

Export taxes
Export duties The export duty is levied on the export for consumption, i.e., the definitive extraction of merchandise from Argentina. Such duty is calculated based on the FOB (free on board) value of goods, valued under the Argentine Customs Code standards. The duties and other taxes levied on exports are excluded from the taxable value as long as they are included in the value of goods. This duty rate ranges from approximately 5% to 25%, according to the characteristics of the exported goods, whose identification, in order to verify the applicable tax rate, shall be made by using the tariffs of Common MERCOSUR nomenclature. In the case of the export of crude oil, there is an additional rate of up to 20% when its WTI (WEST TEXAS INTERMEDIATE) price is higher than USD 32 per barrel. The WTI is a benchmark price for a given oil quality.

Export benefits
Rebates Exporters of unused goods manufactured in Argentina shall be entitled to a total or partial rebate of the amounts paid as internal taxes in the different production and sale phases. Those rebates are applied to a value to be estimated based on the FOB value of the goods to be exported, from which the CIF value of imported goods inputs shall be deducted, as well as the amount paid as commissions and brokerage. The tax base for calculating rebates may not exceed that for calculating export duties. The applicable rebate percentage depends on the classification of goods in the Common MERCOSUR nomenclature and currently ranges from 0% to 6%. Drawback It is a customs system whereby the amounts paid for taxes levied on the import for consumption of goods are totally or partially refunded, as long as those goods are then exported for consumption in the following conditions: a) After having been subject to a transformation, manufacturing, combination, mixture, repair or any other enhancement or improvement process in the customs territory.

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b) Being used to condition or package other goods to be exported.

VAT refund See comment on exports in point 5.3.1. Temporary import for industrial improvement Through this system goods may be imported into Argentina for the purpose of being perfected through an industrial process, with the obligation to be exported in the new form for consumption in other countries; such re-exporting shall take place within a term not exceeding one year for goods manufactured in series and two years for goods not serially produced. Goods imported under that system are not subject to the duties and taxes levied on importation for consumption nor the statistics fee, although they are subject to any other fees for services. Additionally, the CIF value of such goods will be exempt from export duties. The importer is required to provide a guarantee to cover the duties and taxes that would be applicable if the goods in question were eventually imported for consumption. Free-trade zones A free-trade zone is a jurisdiction where goods are not subject to the usual control of the customs service and their import and export are not subject to taxes. Storage, business, service and industrial activities may be developed in the free-trade zone. The latter activity is developed for the sole purpose of exporting the resulting goods to other countries. The main free-trade zone in Argentina is the La Plata free-trade zone, located 50 kilometers away from the City of Buenos Aires.

5.4. Other taxes

5.4.1. Tax on bank account and other transactions
This tax is applied on debits and credits to checking accounts opened with institutions included in the Financial Institutions Law. Furthermore, all fund movements or deliveries are subject to this tax, regardless of the mechanisms used, where they are made through organized payment systems that replace the use of bank checking accounts. The general rate is 0.6% for bank debits and 0.6% for bank credits and there are differential rates for certain transactions.

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5.4.2. Tax on transfer of title to real property owned by individuals and undivided estates
This tax is levied on the transfers of title to real property located in Argentina and owned by a resident or nonresident individual or undivided estate, when this transfer is not subject to income tax. The tax rate is 1.5%.

5.4.3. Tax on personal assets not included in the economic process

Individuals domiciled in Argentina and undivided estates located in Argentina are required to pay, as of December 31 of each year, the equivalent of 0.5% to 0.75% of their assets exceeding a certain amount, located in Argentina and abroad. Nonresident individuals and undivided estates are also liable for this tax on any property they own in Argentina. The tax on shares or ownership interests in companies governed by Business Associations Law No. 19,550, whose owners are individuals and/or undivided estates domiciled in Argentina or abroad, and/or companies and/or any other type of legal entity, domiciled abroad, shall be calculated or paid by the companies governed by the referred law, and the applicable rate shall be 0.50% of the estimated value. In this case, the threshold is not applicable. The tax paid shall qualify as single and definitive payment.

5.4.4. Stamp tax

General remarks This provincial tax is levied on acts formalized through public or private instruments. Each province has its own stamp tax law, which is enforced within its territory. Documents subject to stamp tax are, among others, all types of contracts, notarial deeds, receipted invoices confirmed by debtor, promissory notes, negotiable instruments, etc. The general rate is about 1%, but on certain occasions, for example, when real estate is sold, it may reach 4%. However, rates vary according to the jurisdiction. In the City of Buenos Aires stamp tax is only applicable to the transfer of real estate (no intended for dwelling) and deed of conveyance of vessels (not intended for commercial use), yachts, ships, aircraft and/or similar at the 2.5% rate. Several provinces partially abrogated stamp tax on all formalized financial and insurance transactions earmarked for the agricultural, industrial, mining and construction sectors, under the commitment undertaken upon adhering to the Federal Pact for Employment, Production, and Growth.

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5.5. Tax treaties

Argentina has signed treaties with various European and Latin American countries to avoid double taxation internationally and thus promote investment and reciprocal trade. The treaty signed with the United States of America has not been ratified yet. The effective income tax rates under these treaties, for those items in which an investor would be most interested, are given below: Country General income tax rate Germany Austria Canada Spain Finland France Italy Sweden Bolivia Brazil Chile United Kingdom Belgium Australia the Netherlands Denmark Switzerland (d) Norway Dividends 0-35% (a) 15% 15% 10 or 15% 10 or 15% 10 or 15% 15% 15% 10 or 15% 0-35% (a) 0-35% (a) 0-35% (a) 10 or 15% 10 or 15% 10 or 15% 10 or 15% 10 or 15% 10 or 15% 10 o 15$ Royalties 21 to 31.5% 15% 15% 3 to 15% 3 to 15% 3 to 15% 18% 10 to 18% 3 to 15% 21 to 31.5% (c) 21 to 31.5% (c) 21 to 31.5% (c) 3 to 15% 3 to 15% 3 or 15% 3 to 15% 3 to 15% 3 to 15% 3 to 15% Interest 15.05% to 35% 10 to 15% (b) 12.5% 12.5% 12% 15% 20% 20% 12% 15.05 to 35% (c) 15.05 to 35% (c) 15.05 to 35% (c) 12% 12% 12% 12% 12% 12% 12%

The applicable tax rate is the general rate as determined in the income tax law, or the treaty, whichever lower. Also, Argentina has entered into specific international transportation treaties with several nations. (a) Please refer to Income Tax Tax Rates - Dividends (b) On credits financing equipment sales, bank loans and the financing of public works: 10%. (c) No specific rates have been agreed in the treaty. (d) Application of this treaty is temporary.

6. Labor Legislation and Social Security

6.1. Labour Supply and Relations
Workforce
Argentina has a skilled labour force. Well-trained employees are generally not difficult to locate in most industrial areas. However, in some areas that experience a substantial increase in the volume of industrial activity, a shortage of skilled labour may occur. Methods of recruiting employees vary, depending on the qualifications required, from hiring directly at the employers facilities to using specialized private employment agencies. Agencies are used especially in recruiting for managerial and technical positions. Many are located in the federal district and its surroundings, where the labour force is highly concentrated. Labour contracts are not required to be concluded in writing, and they usually are not.

Executive Compensation
Executives receive various fringe benefits in addition to salary. Foreign companies usually provide such benefits in accordance with the parent companys policies. The most common benefits are employer-provided automobiles, retirement pension plans and bonuses. Surveys show that salaries for managerial positions range from USD 32,500 to USD 195,000 a year, depending on the size of the company and the industry. The average is about USD 54,000. If the employer agrees to pay all income tax and social security contributions on salaries, executive compensation may constitute a significant cost to the employer. For instance, a salary equivalent to USD 54,000 a year free of income tax and social security may result in a total executive compensation cost to the employer of approximately USD 89,500. This kind of agreement is common for expatriates, but not for local employees.

Wages
Wages for industrial and office workers are not the same in all regions of the country. Minimum salaries are generally established by collective bargaining, but supply and demand usually have great influence in determining salaries of the best qualified workers.

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Minimum Wage
A single general minimum wage is established for all industrial and office laborers. It amounts approximately to the equivalent of USD 150 (ARS450) and USD 0.75 (ARS 2.25) for monthly and hourly salaries, respectively. Actual salaries, however, are far higher. Collective labour agreements establish more realistic minimum salary tables, which are generally used.

Labour Legislation
A general Labour Contract Law, complemented by additional laws and statutes related to specific activities, regulates employment conditions throughout the country and collective bargaining agreements. The law does not apply to agrarian laborers, however, whose work conditions are covered by a separate statute.

Labour Union Organisation

Most industrial and office workers are unionized. However, the political influence of unions, as well as their identification with the government, seems to have decreased in recent years.

Collective Bargaining
For many years only a single collective labour agreement for each particular activity was accepted. In November 1991, a government decree permitted the parties to freely select the type of labour negotiation they considered to be the most suitable. The negotiation therefore can be by activity, by one or more sectors of an activity, by expertise or profession, by enterprise or by any other characteristic. Agreements can now consider the specific business and economic situations of the parties better than under the previous general application guidelines.

6.2. Other Employee Benefits

Argentine labour laws are notable for the protection they provide to employees. Regulations cover labour contracts, forms of wage and salary payments, women and minors in employment, and various other matters. Some of the main regulations are detailed below.

Bonuses per Law

Compulsory bonuses are paid on June 30 and December 31 each year. They amount to one-half of the highest monthly remuneration paid to the employee during the semiannual period.

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Paid Vacation
Providing an annual paid holiday is compulsory. The holiday ranges from 14 to 35 consecutive days, depending on the number of years of service. To be entitled to a vacation, an employee must have worked at least half of the working days in the calendar year. New employees are entitled to one day for every 20 days of effective work. The remuneration related to the vacation period must be increased with a vacation additional payment, which amounts to approximately 19.6% per day; thus, the total increase of the monthly salary will depend on the number of vacation days. Likewise, it is important to mention that the company must pay the remuneration related to the vacation period upon the beginning of said period.

Illness and Accidents

Since July 1996, a new Occupational Risks Law is in force. The Occupational Risks requires that a mandatory insurance policy be taken with an authorized Workers Compensation Insurance Company, covering the cost related to medical care, professional rehabilitation, prostheses and orthopedic elements, funeral assistance and indemnities for partial or total disability and death as a consequence of occupational accidents and diseases. Companies can directly cover (without taking out an insurance policy) the costs of these services and/or indemnities, provided they periodically provide evidence of their financial stability. Employers who purchase workers compensation insurance policies are exempt from any civil liability for their employees and the heirs thereof. The insurance premium is set as a percentage of the employees salary, which varies depending on the industry, number of employees and safety regulations compliance.

Unemployment
Workers are included in a government system of compensation for unemployment. Under certain conditions, they are entitled to receive monthly payments for a period of 4 to 12 months, on the basis of variable percentages of the highest monthly salary earned in the 6-month period prior to unemployment. Such payments derive from a fund constituted with a portion of social security contributions. The unemployed are also entitled to receive medical care.

6.3. Main Types of Employment Contracts

Please find below the different types of employment contracts that can be entered into.

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Indefinite period employment contract

This feature need not be stipulated in writing in a contract, since the labour relationship is assumed to be without time limit, unless otherwise stated in the contract. This type of contract begins with a 3-month probation period.

Fixed-Term Contract
Labour legislation provides for employees to be hired under a fixed-term contract. This type of contract must not exceed a 5-year term. The reason why the contract is signed for a fixed term must be stated, e.g., that the person is hired in place of an employee who is ill. Should the contract be terminated before the expiration of the term fixed, the employee can claim compensation for damages.

Severance Pay
Normal severance payments, detailed below, have been increased by 80% for as long as the employment rate remains above 10% (it currently stands at about 14%).

Indefinite Period Contract

The amount of the severance payment is generally equal to one month of the employees remuneration for each year of service (or any period longer than 3 months). The basis for the employees remuneration for this purpose is the highest normal and habitual monthly remuneration received during the last year or during the term during which the services were rendered, whichever is shorter. Such basis must not exceed 3 times the monthly amount resulting from averaging all the remunerations provided for in the collective bargaining agreement. The amount of the severance payment must never be lower than once the remuneration monthly taken as a basis. It is important to point out that, in the case of workers who are not included in collective bargaining agreements, the agreement related to the activity performed in the establishment where the services are rendered will be applicable. This severance payment is reduced in case of force majeure, e.g., a significant downturn in production.

Fixed Term of Contract - Longer Than 1 year

The amount of the severances payment is generally equal to one month of the employees remuneration for each year of service (or any period longer than 10 days). The basis for the employees remuneration for this purpose is the highest normal and habitual monthly remuneration received during the last year or during the term during which the services were rendered, whichever is shorter.

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Such basis must not exceed 3 times the monthly amount resulting from averaging all the remunerations provided for in the collective bargaining agreement. The amount of the severance payment must never be lower than once the remuneration monthly taken as a basis. It is important to point out that, in the case of workers who are not included in collective bargaining agreements, the agreement related to the activity performed in the establishment where the services are rendered will be applicable.

Notice of Dismissal
During the Labor Emergency Period, which was extended until March 31st., 2004, the notice periods are double to the normal periods, which are set forth below.

Contract Without Time Limit

The employer must inform the employee of its decision to terminate the labour relationship according to the following terms:

fifteen days prior to the dismissal date, if the workers length of service ranges between 30 and 90 days; a month prior to the dismissal date, if the workers length of service ranges between 91 days and 5 years; or two months prior to the dismissal date, if the workers length of service exceeds 5 years.

Notice must be served in writing, and will be effective as from the following day in which it is served. During the notice period, an employee is entitled to two free hours each day to search for new employment. Compensation in cash, equal to the salary which would have been earned in that period, may be paid instead of giving notice.

Fixed-Term Contract
The employer must serve notice of the termination of the contract within a term no less than one month nor exceeding 2 months in relation to the agreed termination date.

Unused Vacations
When the labour relationship is finished, the employee must be paid an amount equivalent to 1 working day per each 20 days actually worked during the year. Such amount is paid as unused vacations. This amount is determined in the same way for both types of employment contracts.

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Proportion of Statutory Annual Bonus

It is important to point out that the statutory annual bonus (Sueldo Anual Complementario) is a mandatory additional salary paid during the year in two semiannual payments in June and December. The amount of each payment is equivalent to half a monthly salary. When the labour relationship is finished, the employee must be paid the proportion of the yearly bonus accrued during that half year. For example, if an employee finishes his/her labour relationship at the end of November, the proportion of the bonus must be calculated considering the relative portion of half a monthly salary related to the time worked during that half year (in this case, 5 months). This amount is determined in the same way for both types of employment contracts.

Other Contracts which do not imply an employment relationship Training Contract

The purpose of this contract is to complete the education in a theoretical-practical way. This type of contract can be signed by young people between 15 and 28 years old. These contracts have a minimum 3-month term and a maximum 1-year term. After the maximum term expires, the contract cannot be renewed. The working period cannot exceed 40 hours weekly. The number of trainees cannot exceed 10% of the companys payroll. If the company is staffed with 10 employees or less, the law allows for only one trainee. Upon the termination of the contract, the employer must issue a certificate stating the experience or specialization acquired by the trainee, which must be duly signed by a responsible person.

Indemnification due to Cessation or Termination of the Contract

If the relationship terminates due to the expiration of the contract term, the employer need not pay any amount whatsoever as severance payment.

Notice of Dismissal
The employer must give notice of the termination of the contract 30 days prior to the contracts expiration date. If the employer does not give such notice, the trainee must be paid, upon termination of the contract, an amount equivalent to half a months remuneration as severance payment.

Internship

This type of contract can be entered into by students, since its main purpose is to foster the practice related to his/her education and qualifications.

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In order to enter into this type of contract, the company must sign agreements with the different universities and educational institutions The Ministry of Labour and Social Security has not yet issued the regulations for this type of contract.

6.4. Social Security

Salaries paid to employees who are not directors are subject to withholdings and contributions destined to the Social Security System. Please find below a detail of the withholdings and contributions to be made by employers and employees on the salaries, according to the legal rules: Item Coverage against old age, disability or death Retirement and Pension Medical Care Family Allowances National Unemployment Fund Medical Care (coverage for the employee) Total Employer % 10.17 1.50 4.44 0.89 6.00 23.00 Employee % 11.00 3.00 --------3.00 17.00

If the Companys main activity is commerce or the provision of services, and its average sales for the last three fiscal years is higher than USD 16,000,000 (ARS 48,000,000), then the Social Security Taxes borne by the company amount from 23% to 27%. The withholdings to be performed by employers from their employees amount to 17% of their salary, and employers taxes amount to 23% -or 27%- of the salaries. Such percentages are applied to a maximum amount of USD 1,600 (ARS 4,800) monthly. The premiums the employer must pay for the Workers Compensation Insurance must be added to the abovementioned amounts; such policy which will cover labour accidents which the employees may suffer at the Company. The amount of contributions to be paid will depend on the risk evaluated by the insurance company hired for this purpose. Exemptions The Argentine legislation provides for a special exemption from Social Security withholdings and contributions for all those professionals and/or technicians hired to carry out their activities in Argentina for a period not exceeding 24 months, as long as they are covered against old age or disability in their respective countries of origin. Self-Employed Individuals Workers who do not have an employer are required to make a contribution to a specific pension fund. The amount of the contribution is not related to actual income earned; rather, it is established as a percentage of presumed income depending on the activity performed. The average monthly contribution is equivalent to approximately USD 85.

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Corporations directors and legal representatives of local branches must contribute to the Social Security System as self employed individuals even if they are carrying out their activities as dependent employees. Contributions to the Social Security System as dependent employees are not mandatory for such individuals, nor for the employer. Totalisation Agreements Argentina has entered into agreements for reciprocity in social security with Brazil, Chile (partially in force), Greece, Italy, Peru (not regulated), Portugal, Spain, and Uruguay.

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