Openness to Foreign Investment
There are no formal restrictions upon foreign investment in Paraguay. National treatment of foreign investors is guaranteed by law 117/91, as is full repatriation of capital and profits by law 60/90. Historically, Paraguay's tax burden has been the lowest in Mercosur. The corporate income tax rate is currently ten (10) percent, a personal income tax of ten (10) percent will take effect in 2009, and Paraguay has a ten (10) percent value added tax on most goods and services.
Government efforts to attract foreign investment through privatization have progressed slowly because of political opposition. Four state-owned companies have been privatized in the past: the airline in 1994; the state-owned liquor producer, bought by its workers in 1995; the state merchant marine, split into five separate entities, three of which were sold in 1996; and the state steel company, sold in late 1997. The GOP refinanced the liquor producer after privatization and now the state is again the majority shareholder.
Political realities render further outright privatizations unlikely in the medium-term. The large state-run companies most attractive to foreign buyers (such as the telecom and electricity distribution companies) employ thousands of potential voters and are outlets for political patronage. The telephone and electricity companies were in the process of being privatized when the government suspended their privatization in June 2002, bowing to political pressure. The current government has said that it is against privatization. The following are presently state-owned monopolies: rail, oil & gas, cement, electricity, water, and basic and long distance land-line telephone services.
Paraguay has a legal framework for maquila operations – businesses that process in Paraguay goods or services for export. The value-added in the process is subject to a tax rate of just one percent. Inputs are allowed to enter Paraguay tax free in most cases. The regime is flexible in that it allows up to ten percent of production to be sold locally, albeit after paying relevant import taxes and duties. Maquila operations are not restricted geographically or by industry. Existing operations include software design and other services as well as manufacturing. The Ministry of Industry and Commerce has a special office for promoting maquila investments:
(http://www.mic.gov.py/index.php?option=com_content&task=view&id=135&Itemid=237)
In 2005, a law took effect that prohibits foreigners from countries bordering Paraguay (Brazil, Bolivia and Argentina) from owning land within 50 kilometers of Paraguay’s borders. The judicial sector is a weak point in the investment climate. Many investors find it difficult to adequately enforce contracts due to judicial inefficiency and corruption.
Conversion and Transfer Policies
There are no restrictions on the conversion or transfer of foreign currency. In late 1994, the government permitted foreign currency contracts, legitimizing a long-standing practice. Law 60/90 permits the repatriation of capital and profits. There are no controls on foreign exchange transactions, apart from reporting requirements to banking authorities for transactions in excess of USD 10 thousand. The free-floating exchange rate on January 4, 2008, was 4,730-4,820 guaranies to the U.S. dollar.
Expropriation and Compensation
Private property in general has historically been respected in Paraguay as a fundamental right. There have been several cases, though, of expropriations of land without prompt and fair compensation over the past few years. In 2005, Paraguay’s Congress approved the expropriation of a large chunk of foreign-owned land in Paraguay’s Chaco region although errors in the delineation of the land and continued negotiation with the landowners have delayed the process.
Over the course of 2004, groups of “landless” peasants, calling on the government to give them land for farming, carried out a series of “land invasions”, occupying large farms owned in some cases by Brazilians or Paraguayans of Brazilian descent. This movement gained momentum over the course of the year until late 2004 when the government took strong measures, including authorizing the military to support the police in removing the peasants from some of the properties. Few such incidents occurred in the last three years.
Dispute Settlement
Law 117/91 guarantees national treatment for foreign investors. This law allows international arbitration for the resolution of disputes between foreign investors and the government. Paraguay became a member of the International Center for the Settlement of Investment Disputes (ICSID -- also known as the Washington Convention) in October 1982 (Law 944/82). The Inter-American Development Bank financed the creation of a center for alternative dispute resolution.
The legal system underwent fundamental reform in recent years, although many would argue that improvements to the system have been incremental at best. Six of nine Supreme Court justices were removed or resigned from office and were replaced in 2003. One vacancy is to be filled in early 2008. A Council of Magistrates appoints appellate and lower court justices as well as prosecutors. A criminal procedures code entered into affect in March 2000, and congress passed a new penal code in December 2007, which is pending presidential approval. These codes modernized Paraguay’s penal code and included improvements in money laundering and intellectual property rights. Other factors, such as time limits on investigations and disclosure requirements hinder the prosecution of complex crimes.
These reforms made the legal process more transparent, but will require training for public prosecutors and judges and an increase in the number of public prosecutors. Both the commercial and civil codes cover bankruptcy and give priority for claims first to employees, then to the state, and finally to private creditors.
Historically, Paraguay’s judicial system has been characterized by a lack of independence and corruption. While efforts are underway to strengthen the rule of law and make the judicial process more transparent, unbiased and fair, corruption, patronage and bias are features of the current judicial system.
Performance Requirements and Incentives
A number of fiscal incentives (mainly tax breaks), contained in law 60/90, are available to all investors. Voting board members of any company incorporated in Paraguay must have legal residence. This has posed some obstacles to potential foreign investors. Another potential roadblock is Paraguay's law protecting agents and distributors (law 194/93). The law features strong penalties for severing relations with a local distributor or agent. This has on occasion led to expensive out-of-court settlements, since just cause must be proved for severing the relationship and indemnification must be paid. However, courts have ruled against distributors in a few cases when just cause has been established.
Right to Private Ownership and Establishment
Foreign and domestic private entities may establish and own business enterprises. Foreign businesses do not need to be associated with Paraguayan nationals for investment purposes. There is no restriction on repatriation of capital and profits. Private entities may freely establish, acquire, and dispose of interests in businesses.
Protection of Property Rights
The 1992 constitution guarantees the right of private property ownership. While it is quite common to use property as security for loans, the lack of consistent property surveys and registries often makes it impossible to foreclose. Acquiring title documents for land can take two years or more. A World Bank project aimed at standardizing registration in the department (state) of Alto Parana concluded in 2000, but only covered a small area.
Intellectual Property Rights:
Paraguay is recognized as a regional distribution and manufacturing center for counterfeit merchandise. The re-export trade to Brazil, catering to consumer demand for electronics, CDs/DVDs, designer clothing/footwear, among other items is rife with piracy. Based on the seriousness of industry concerns, Paraguay was designated as a Priority Foreign Country in January 1998 by the U.S. Trade Representative. In November 1998, Paraguay and the United States signed a Memorandum of Understanding (MOU) detailing future actions to combat IPR crime and to protect intellectual property rights, and placing Paraguay on Section 306 Monitoring. That MOU expired and, to address remaining concerns, the United States and Paraguay signed another MOU in March 2004, which was extended in 2006 through the end of 2007. To continue to address remaining concerns a new two-year MOU was negotiated and finalized in November 2007. Trademark and copyright laws were enacted in October 1998, and the Senate passed a patent law in April 2000 that was modified and weakened in June 2005. Under the new penal code IPR offenders now face stiffer penalties (two to eight years jail time and/or fines) and, a fraudulent imitation of a product is separately recognized as an offense. Paraguay ratified all the Uruguay Round accords, including TRIPS, in late 1994 and has ratified two WIPO copyright treaties.
In the last three years, seizures and destruction of counterfeit and pirated goods have increased markedly and the government has cooperated closely with industry groups to help fight piracy and counterfeiting. In addition, measures by Brazil to control the trafficking of pirated and contraband goods coming in from Paraguay are having a significant positive effect. Nevertheless, IPR crime remains a major source of illicit income in Paraguay, particularly in Ciudad del Este, the Paraguayan city on the border with Brazil in what is known as the tri-border region (with Argentina).
Paraguay does not have a framework for safeguarding confidential data associated with regulatory approvals. As a result, some companies have decided not to market certain products, such as the latest pharmaceuticals, in Paraguay.
Transparency of the Regulatory System
The Civil Code and Law 1,034/83 regulate business and industrial activities in the country. Under the existing framework, the Ministry of Industry and Commerce is charged with overall industrial policy coordination; the Ministry of Finance handles tax and fiscal policy; and the Central Bank is the principal coordinator of monetary policy. All businesses need to be registered in three places: the municipality for a business permit, the Ministry of Industry and Commerce unit at the central civil registry, and the Finance Ministry for tax purposes. The multiple registration procedure involved multiple steps which took over three months to complete. However, in late 2006 the government instituted a coordinated system among all the offices involved, which reduced the process to one step to be completed in a little over one month, and lowered the cost to the registrants from USD 840 to approximately USD 250. The Ministry of Health and the Municipality of Asuncion both regulate food safety issues, which can include processed food imports and imports for fast food franchises.
Regulatory agencies for sectors such as telecommunications, energy, and potable water are relatively new or in the process of being established. CONATEL, the telephone regulatory agency, is only nominally independent as the president of Paraguay chooses its president, who is also subject to influence by the Minister of Public Works and Communications. A regulatory framework for potable water has been established, but the energy sector shows little indication of establishing a regulatory framework in the near future.
Draft laws are often introduced into Congress by special interest groups with few opportunities for public comment. Public participation often requires direct lobbying and press campaigns. The new government has increased its outreach to the public and coordination with the private sector when devising regulations to implement new laws.
Efficient Capital Markets and Portfolio Investment
Paraguay has a relatively small Asuncion capital market that started operating in 1993. In 2004 the market handled USD 15.95 million in transactions. In local currency terms, the volume increased 57 percent in 2005, and 91 percent in 2006. In 2007, the amount handled increased to almost Gs.211 billion, or USD 41.82 million at the yearly average exchange rate (Gs.5,045 to the U.S. dollar).
There are currently 70 companies traded. The high cost of capital makes the market an attractive alternative, but the fear by family enterprises of losing control has tempered the enthusiasm for public offerings. Most of the exchange’s volume occurs in fixed income securities.
Credit is available through numerous sources. High collateral requirements are generally imposed. The banking system is generally sound, but remains overly liquid. As of July 2007, the top eight private banks, of the twelve operating in the market, had 86.8 percent of the USD 3,541.6 million total assets of the local private banking system.
The system-wide level of non-performing loans in 2007 was 1.7 percent of total loans, down significantly from 3.28 percent in 2006, and 6.45 percent in 2005.
Independent audits of financial statements are not legally mandatory. Paraguay’s institute of accountants has adopted the international audit guidelines issued by the federation of accountants.
Political Violence
Paraguay has not traditionally been affected by political violence. The 1999 assassination of Vice-President Argana and the following political clashes resulting in eight deaths were unprecedented. Two deaths occurred in 2004 when the army and police were mobilized to control nationwide demonstrations and land invasions by landless peasants. Separately, while Paraguay has been spared the large number of kidnappings that occur in neighboring Latin American countries, the 2005 high-profile kidnapping and murder of former Paraguayan President Cubas’ daughter increased concern over the security situation in the country. Violent demonstrations broke out in late 2006 in response to an unpopular, controversial court decision involving defendants implicated in the 2004 supermarket fire that caused almost 400 deaths.
Corruption
One of the most serious problems facing Paraguay is the legacy of institutional corruption after decades of dictatorship. There have been mechanisms created to combat corruption, such as the comptroller’s office, but investigations often become political and are seldom completed. The slow pace of judicial reform and continued impunity are barriers to development. The current government has taken several important steps, including the creation of a transparent, internet-based government procurement system, the reform of the process for selecting prosecutors and judges, the appointment of respected apolitical officials to some key posts, and increased civil society input and oversight. However, weak state institutions, the lack of a rational civil service system, and uneven political will impede efforts to fight corruption.
Bribery is a crime in Paraguay, but one that is rarely prosecuted. Paraguay has signed the UN Convention Against Corruption, but is not a party to the OECD Convention on Combating Bribery.
Bilateral Investment Agreements
Paraguay has bilateral investment agreements or treaties with the following countries: Argentina, Brazil, Chile, France, South Africa, Taiwan, United Kingdom, and Uruguay. Paraguay has signed other investment agreements with Austria, Benelux, Costa Rica, Ecuador, El Salvador, Germany, Hungary, Korea, Netherlands, Peru, Romania, Spain, Switzerland, and Venezuela.
Paraguay has signed the following agreements with the United States: Agreement relating to investment guaranties (OPIC), 1955; Agreement relating to investment guaranties (OPIC), 1992. A complete listing of bilateral agreements can be found via the following link:
http://www.state.gov/s/l/treaties/c15824.htm
OPIC and Other Investment Insurance Programs
In 1992 the United States and Paraguay signed an investment guaranties agreement, which replaced the agreement signed in 1955. In addition, the Paraguayan government issued a decree on the same day delegating the authority to approve cases to the Ministry of Industry and Commerce. This allowed OPIC to begin full operations in Paraguay. OPIC has financed telecommunications and forestry projects.
Paraguay is a member of the World Bank’s Multilateral Investment Guarantee Agency (MIGA), which offers foreign investment guarantees against non commercial risks, such as inconvertibility of foreign currency, discriminatory expropriations, contract non-fulfillment, civil uprisings and war.
Paraguay also ratified the agreement creating the International Center for the Settlement of Investment Disputes (ICSID) between states and nationals, and nationals of other states, in order to access a mechanism of international arbitration and conciliation.
Labor
As of December 2006 the labor force was estimated at 2.73 million workers. The Paraguayan labor force data includes persons ten years of age and older. About 100,000 people enter the workforce each year. Total unemployment (open plus hidden unemployment) for 2006 officially stood at 11.4 percent, up from 9.4 percent in 2005, and 10.9 percent in 2004; the 2003 figure was 13.0 percent. Total underemployment for 2006 stood at 24.0 percent, down from 25.1 percent in 2005, and similar to the 24.0 percent for the previous two years. With a population growth rate above two percent annually, a key challenge is the creation of enough jobs to meet increasing demand. While the supply of workers is relatively large and growing, a weak education system limits the supply of well-educated workers. Local businesspersons cite the lack of a skilled work force as a major obstacle to growth.
Foreign Trade Zones / Free Ports
Paraguay is a landlocked country with no seaports. However, it has been granted free trade ports and warehouses in neighboring countries' seaports for the reception, storage, handling, and transshipment of merchandise transported to and from Paraguay. About three- fourths of goods are transported by barge on the large river system that connects Paraguay with Buenos Aires, Argentina, and Montevideo, Uruguay. The Paraguayan port authority manages the free trade ports and warehouses. Paraguayan free trade ports are located in Argentina (Buenos Aires and Rosario); Brazil (Paranagua, Santos, and Rio Grande do Sul); Chile (Antofagasta and Mejillones); and Uruguay (Montevideo and Nueva Palmira). To date, the three Brazilian free trade ports, Nueva Palmira in Uruguay, and the two Chilean free trade ports are in full operation.
Foreign Direct Investment Statistics
As of March 2007, the total stock of foreign direct investment in Paraguay stood at USD 1,602.52 million, and USD 1,126.46 million in 2005, according to Central Bank statistics. The United States was the largest foreign investor in Paraguay, with USD 616.50 million, followed by Brazil with USD 230.85 million, and the Netherlands with USD 130.14 million.
Large U.S. investments over in recent years include nearly USD200 million by Millicom, a mobile phone operator with shares listed on the NASDAQ exchange, and USD 37 million invested by Mastec to develop another wireless communication network (this network was later sold to Hutchison Communications Ltd. of Hong Kong, and resold in 2005 to America Movil, of Mexico). Other investments include the USD 25 million purchase of a grain crushing facility by Cargill; approximately USD 60 million invested in a river transportation company; USD 27 million invested by Exxon; and several million dollars worth of investments by fast food companies (Pizza Hut, Burger King, McDonald's).
According to Central Bank statistics, during 2006 foreigners invested a total of USD 110.98 million in Paraguay, up from USD 34.79 million in 2005. The largest foreign investors in 2006 were the United States with USD 67.37 million, followed by Brazil with USD 31.10 million, and Mexico with USD 30.98 million.
From January to November 2007, Paraguay’s Ministry of Industry and Commerce approved USD 128.4 million in investment projects falling under special law 60/90, which establishes various tax exemptions for new investments. In 2006, investment projects were approved for a record USD 296 million. The projects represent approved plans and not necessarily consummated investments. The 2007 projects were split between domestic capital (64.26 percent) and foreign capital (35.74 percent). Sectors to benefit with approved investments are the industrial sector (principally the chemical products industry and food products industry) with 53.79 percent, followed by the services sector with 44.47 percent of total investments.
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