2012 Investment Climate Statement
Bureau of Economic and Business Affairs
June 2012
Report

Openness to, and Restrictions Upon, Foreign Investment

The Government of Paraguay (GOP) encourages foreign investment and most sectors are open for private investment. Paraguay guarantees equal treatment of foreign investors under law 117/91 and permits full repatriation of capital and profits under law 60/90. Paraguay has historically maintained the lowest tax burden in the region, with a 10% corporate tax rate and a 10% Value-added Tax (VAT) on most goods and services.

The GOP is exploring concessions to improve road, rail, and waterway networks and to upgrade the international airport, but political disagreements have delayed most projects. A confusing and contradictory legal framework for oil and gas concessions has generated contractual disputes with investors, including U.S. investors.

Paraguayan law supports maquila operations, with the value-add subject to a 1% tax rate. In most cases, inputs are allowed to enter Paraguay tax free, and up to 10% of production is allowed for local consumption after paying import taxes and duties. Maquila operations are not restricted geographically or by industry.

Paraguay’s electricity distribution infrastructure is in need of significant investment and upgrades. Paraguay is currently building 400 kilometers of 500-kilovolt transmission line, two new sub-stations, and making other major infrastructure improvements to the power grid, but more needs to be done. These projects are usually open to foreign investors.

Judicial insecurity hinders Paraguay’s investment climate. Many investors find it difficult to adequately enforce contracts and are frustrated by lengthy bureaucratic procedures and limited transparency and accountability.

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Measure

Year

Index/Ranking

TI Corruption Index

2011

154 of 183

Heritage Economic Freedom

2011

77 of 179

World Bank Doing Business

2012

102 of 183

MCC Gov’t Effectiveness*

2012

17% - Not Passing

MCC Rule of Law

2012

17% - Not Passing

MCC Control of Corruption

2012

28% - Not Passing

MCC Fiscal Policy

2012

85% - Passing

MCC Trade Policy

2012

84% - Passing

MCC Regulatory Quality

2012

62% - Passing

MCC Business Start Up

2012

22% - Not Passing

MCC Land Rights and Access

2012

59% - Passing

MCC Natural Resource Protection

2012

61% - Passing

* MCC scores are ranked relative to Paraguay’s peer group of Lower Middle Income Candidate Countries; 50% represents the median, 0% is the worst, and 100% is the best. Scores above the median meet the performance standard. Scores at or below the median do not meet the performance standard.

Conversion and Transfer Policies

There are no restrictions on the conversion or transfer of foreign currency. Law 60/90 permits the repatriation of capital and profits. There are no controls on foreign exchange transactions, apart from bank reporting requirements for transactions in excess of USD 10,000.

Expropriation and Compensation

Private property has historically been respected in Paraguay as a fundamental right. However, there have been several cases in recent years of expropriations of land without prompt and fair compensation. In 2005, Paraguay’s Congress approved the expropriation of a large piece of foreign-owned land in the Chaco region in the western half of Paraguay. The government compensated the landowners after lengthy negotiations. In recent years groups of “landless” citizens have occupied several farms in order to press the GOP for agrarian land reform.

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 GOP. Paraguay is a member of the International Center for the Settlement of Investment Disputes (ICSID).

Public institutions in charge of large infrastructure projects often pose difficulties for foreign investors. American investors have described significant frustration during bidding attempts. The Dirección Nacional de Contrataciones Públicas (DNCP or National Directorate for Public Contracts) exists to ensure transparency and fairness in public bids. Of the 1,563 bids held by the DNCP in 2010, only 43 were open to international companies. Of those, only 5 were awarded to international companies. Corruption in the judicial system has been a source of frustration for foreigners whose cases have passed to the courts for settlement.

Performance Requirements and Incentives

A number of tax breaks contained in Law 60/90 are available to investors. Voting board members of any company incorporated in Paraguay must have legal residence, which takes a minimum of 90 days to establish. This could pose an obstacle to potential foreign investors.

Under Paraguayan law 194/93, foreign companies must demonstrate just cause to terminate, modify, or decide not to renew contracts with Paraguayan distributors. Severe penalties and high fines may result if a court determines that the foreign company ended the relationship with its distributor without first having established that just cause exists. This requirement often leads to expensive out-of-court settlements. In a few cases, the courts have upheld the rights of foreign companies to terminate representation agreements after finding the requisite showing of just cause. However, this law may discourage U.S. investment due to concerns about potential lawsuits and interference with contractual relations in the future.

Regarding customs procedures, Paraguay requires that specific documentation for imports, such as the commercial receipt, certificate of origin, and cargo manifest, be certified by either the Paraguayan consulate in the country of origin or, by paying an additional fee, at the Ministry of Foreign Affairs in Paraguay. Paraguay also requires all companies operating in the country to contract the services of a customs broker. The customs broker fees are standardized by Paraguayan law.

Paraguay is not a signatory to the WTO Agreement on Government Procurement. In December 2011, the GOP passed a new law (4558/11) that gives preference in government bids to locally produced goods even if they are up to 20 percent more expensive than imported goods.

Right to Private Ownership and Establishment

Foreign and domestic private entities may establish and own business enterprises. Foreign businesses are not legally required 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 business interests.

Protection of Property Rights

The 1992 constitution guarantees the right of private property ownership. While it is common to use property as security for loans, the lack of consistent property surveys and registries often makes it impossible to foreclose. In some cases, acquiring title documents for land can take two years or more.

Paraguay’s porous border region with Argentina and Brazil is a known center of piracy and contraband. The United States continues to monitor implementation of the Memorandum of Understanding between the United States and Paraguay pertaining to IPR protection and enforcement, which was revised in 2009 and will remain in effect through April 2012. Paraguay is currently under Section 306 monitoring in the U.S. Trade Representative’s Special 301 Report.

Although the revised penal code with tougher penalties (two to eight years jail time and/or fines) for IPR violations became effective in 2009, only one case has made it successfully through prosecution to conviction. Paraguay has ratified all of the Uruguay Round accords, including the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), and has ratified two World Intellectual Property Organization (WIPO) copyright treaties.

Concerns also remain about inadequate protection against unfair commercial use of undisclosed test or other data generated to obtain marketing approval for pharmaceutical products and the shortcomings in Paraguay’s patent regime. Law 3283/07 and Law 3519/08 require that pharmaceutical products and agrochemical products be first registered in Paraguay to be eligible for data protection. The law also limits data protection to five years instead of the international standard of ten years. Additionally, law 2593/05 that modifies Paraguay’s patent law has no regulatory enforcement. Because of this, foreign pharmaceutical companies have seen their patented products openly replicated and marketed under other names by Paraguayan pharmaceutical companies.

Transparency of the Regulatory System

The business registration process was modified in late 2006 with USG assistance. The GOP instituted a coordinated system among all the offices involved, reducing the number of steps and the time to open a business to 35 days and lowering the cost to approximately USD 250. This is an improvement; however, some aspects of opening a business are still lengthy and costly, such as building health inspections and environmental licenses.

Regulatory agencies supervisory functions over telecommunications, energy, potable water, and the environment are inefficient and opaque. Politically motivated changes in the leadership of regulating agencies negatively impact firms and investors. Corruption is common in these institutions as time consuming processes provide opportunities for front-line civil servants to seek bribes to accelerate the paperwork.

Efficient Capital Markets and Portfolio Investment

Paraguay’s banking system includes 15 banks with a total USD 11.9 billion in assets and USD 8.7 billion in deposits. Non-performing loans in the banking sector totaled just 1.76% of total loans in 2011. The banking system is generally sound but remains overly liquid. Long term financing for capital investment projects is scarce. Most lending facilities are short term.

Credit is available but expensive. High collateral requirements are generally imposed. The high cost of capital makes the stock market an attractive, although underdeveloped, option. Paraguay has a relatively small capital market that began less than 20 years ago. In 2011, the Asuncion Stock exchange, comprised of 93 companies, handled USD 82 million in transactions, compared to USD 127 million in transactions in 2010. Many family-owned enterprises fear losing control, dampening enthusiasm for public offerings.

Competition from State Owned Enterprises

Paraguay’s State Owned Enterprises (SOEs) are active in the oil (fuel distribution), cement, electricity (distribution and generation), water, and telecommunication sectors. In general, SOEs are monopolies with no private sector participation. Most of the SOEs operate independently but maintain an administrative link with line ministries, namely the Ministry of Public Works.

SOEs’ corporate governance is weak. Only the Itaipú and Yacyretá bi-national hydroelectric dams have a board of directors. Other SOEs operate with politically appointed advisors and executives. Only the two bi-national dams are required to have an independent audit. The SOEs are often overstaffed and are an outlet for patronage, resulting in poor administration and services. The SOEs burden the country’s fiscal position, running deficits most years.

Corporate Social Responsibility

Corporate Social Responsibility (CSR) is growing with the support of Paraguay’s largest firms. Additional, the private sector is taking measures to institutionalize ethical business conduct under initiatives such as the Pacto Etico Comercial (Ethical Business Pact). An initiative sponsored by the U.S. Department of Commerce, the Pacto Etico Comercial includes over 100 local, U.S., and international companies that have committed to create a code of ethics and undergo a rigorous auditing process to reach certification.

Political Violence

Paraguay has not traditionally been affected by political violence. While Paraguay has been spared the large number of kidnappings that occur in neighboring Latin American countries, there have been a few high profile cases in recent years, most of them attributed to the leftist Paraguayan People’s Army (EPP). The GOP has responded to the EPP threat with combined military and police operations. Land invasions, marches, and organized protests occur, mostly by rural and indigenous communities making demands on the government, but these events rarely turn violent.

Corruption

Paraguay has a legacy of corruption that is slowly being addressed. The GOP has taken several steps to combat corruption, including: the creation of a transparent, internet-based government procurement system; the appointment of respected apolitical officials to key posts; and increased civil society input and oversight.

The cornerstone of U.S. anti-corruption assistance to Paraguay was the USD 30.3 million, two-year MCC Threshold Country Program (TCP) Stage II, which, in the main, ended in October 2011 (with a few projects continuing until April 2012). TCP Stage II sought to strengthen prosecutors’ investigative capacity, the judiciary’s disciplinary and internal control systems, the public administration’s internal control mechanisms, and control over contraband and smuggling.

Bribery is a crime in Paraguay but is rarely prosecuted. Paraguay signed the United Nations Convention against Corruption in 2005.

Bilateral Investment Agreements< /p>

Paraguay has bilateral investment agreements or treaties with the following countries: Argentina; Austria; Belgium; Brazil; Chile; Costa Rica; Ecuador; El Salvador; France; Germany; Hungary; Korea; Luxembourg; the Netherlands; Peru; Romania; South Africa; Spain; Switzerland; Taiwan; the United Kingdom; Uruguay; and Venezuela.

The Paraguay-United States Open Skies agreement went into effect in May 2005; however, a dispute over mandatory travel agent commissions under Paraguayan law caused the only U.S.-flagged carrier to leave Paraguay shortly thereafter. Paraguay and the United States discuss investment and trade priorities at the annual Joint Council on Trade and Investment (JCTI), a bilateral mechanism to advance common investment and trade objectives.

OPIC and Other Investment Insurance Programs

The United States and Paraguay signed a 1992 investment guaranty agreement, allowing OPIC to begin full operations in Paraguay. OPIC has financed telecommunications, forestry projects, and various renewable energy projects. OPIC has also partnered with Citibank to support over USD 160 million in loans for small and medium sized enterprises (SMEs) and for micro finance loans.

Paraguay is a member of the World Bank’s Multilateral Investment Guarantee Agency (MIGA).

Labor

With a population growth rate above 3% per annum, job creation to meet the large and growing labor force is one of the most pressing issues for the GOP. However, the weak education system limits the supply of well-educated workers. Local businesspeople cite repeatedly the lack of a trained work force as a major obstacle to growth.

The rigidity of Paraguay’s labor code also hinders employment and productivity. It is very difficult to lay-off a full-time employee after ten consecutive years of employment. Firms often opt for periodic renewals of “temporary” work contracts.

Foreign Trade Zones/Free Ports

Paraguay is a landlocked country with no seaports. About three-fourths of commercial goods are transported by barge on the Paraguay-Parana river system that connects Paraguay with Buenos Aires, Argentina and Montevideo, Uruguay. Paraguay has agreements with Uruguay, Argentina, Brazil, and Chile on free-trade ports and warehouses for the reception, storage, handling, and trans-shipment of merchandise.

In late 2010, the Buenos Aires port union implemented a 30-day blockade of Paraguayan commerce. The blockade was lifted only after President Lugo threatened to boycott the looming MERCOSUR Summit. Competition for control of the waterway, the underlying cause for the port confrontation, persists.

Foreign Direct Investment Statistics

Total foreign direct investment (FDI) was USD 3 billion in 2010 (17% of GDP), up from USD 2.6 billion in 2009 (15% of GDP), according to Central Bank statistics. The services sector accounted for 70% of FDI and manufacturing for the remaining 30%. The United States is the largest foreign investor in Paraguay with USD 1.6 billion, followed by Brazil at USD 529 million, Argentina at USD 294 million, and Spain at USD 222 million.

American fast food companies (Pizza Hut, Burger King, McDonald's) all expanded their presence in 2011. American agro business leader Archer Daniels Midland (ADM) invested USD 23 million in the nation’s first fertilizer plant in 2010 and is currently building an oil processing plant.

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