Presentation made for the International Tax Planning Association’s Meeting, Miami, 11-13 November, 2001.
1.1.- Before going into the individual analysis of each legal regime of foreign investments in Argentina, Brazil and Mexico, it is important to point-out that these suffered profound and extensive modifications in the 1990s, as a result of market liberalisation in Latin America. Such modifications comprehended not only the lifting of most of the existing restrictions on foreign capital, including some of constitutional nature, but also many of monetary nature. Argentina, for instance, adopted in 1991 a dollar peg with a freely convertible currency, Brazil migrated from the transitory to the standard clause of the IMF agreement, making its currency a convertible one, the same happening with Mexico. Both Argentina and Mexico entered into investment agreements with the United States of America (USA) guaranteeing convertibility, and Mexico signed one with the European Union as well.
1.2.- Starting at given points in the 90s, all those countries had significant fiscal successes in the respective monetary policies, comparably with the preceding years and decades, and thus have succeeded in attracting large amounts of foreign investments, as we have seen in my power point presentation. Monetary policies are more similar between Brazil and Mexico, with Argentina´s differing. After the analysis of the individual legal regimes, I will conclude with some thoughts on the benefits and shortcomings of foreign investments in the region and the perspectives for the future.
2.- BASIC POINTS OF THE LEGAL TREATMENT OF FOREIGN CAPITAL INVESTMENTS IN ARGENTINA, BRAZIL AND MEXICO
2.1.1.- Foreign investments in Argentina are regulated by the Foreign Investment Law 21,382 of 1976, as subsequently amended, and by several international treaties. This vast body of legislation deals not only with the legal treatment of foreign investments, but with matters of foreign exchange, jurisdiction, choice of law, monetary policy, etc. Argentine law guarantees foreign capital investments non-discriminatory treatment in relation to national capital. The only differentiated treatment remaining in Argentine law, with respect to limitation of foreign capital investments, pertains to the area of broadcasting or land in frontier areas. The former, however, has been construed by jurisprudence to be illegal. On the other hand, the latter depends on prior governmental approval.
2.1.2.- Foreign investments in Argentina are regarded by local law to be those originated abroad as direct or portfolio investments, in any local economic activity. There are no limitations as to profit remittances or capital repatriation. Furthermore, the distribution of profits or dividends in Argentina is not, in general, subject to taxation, except in specific circumstances.
2.2.1.- In Brazil, Law 4131 of 1962, as extensively amended, the Common Market of the South (MERCOSUL) treaty and sundry regulatory acts enacted by the Central Bank of Brazil, regulate foreign capital investments. Brazilian law guarantees non-discriminatory treatment to foreign capital. However, even if most restrictions on foreign capital were lifted in the 90s, some remain and include the property of rural areas; the exploration, transportation and refinery of oil; the exploration, transportation and industrialisation of nuclear materials; the property of areas in frontier zones; broadcasting and press; and re-insurance.
2.2.2.- There are no limitations as to the remittance of dividends or profits and as to the repatriation of capital. In general, the distribution of dividends is not taxed, but there are some exceptions, including a taxation of capital gains at source at a rate of 15%. Foreign capital investments and loans must be registered with the Central Bank of Brazil, which is done by electronic means. This register will record investments, re-investments, remittances of profits or dividends and the repatriation of capital. It will also record payment of interest and repayment of the principal, in case of loans.
2.3.1.- In Mexico, foreign investments are regulated by the Foreign Investment Law of 25 December 1996, in addition to international treaties. This new law adjusted the internal legal order to commitments assumed by the country in connection with the North-America Free Trade Agreement (NAFTA) and to the new times, with a view to simplifying the bureaucratic procedures required of foreign investors, providing them with added security and promoting foreign investments.
2.3.1.- There are some restrictions, however, on investments in certain areas of economic activity in Mexico. Accordingly, only the Mexican government may own or engage in operations involving the production of oil, electricity, mail and telegraph and related products and activities. Thus, activities pertaining to services such as the operation of credit unions, retail trade in petrol and gas, and certain in the transportation area are reserved to the Mexican government.
2.3.2.- On the other hand, certain investments may be made by foreign capital, but subject to certain limitations as to the percentage of the share capital of the recipient company, which involve capital control by Mexican nationals. This will depend on the area of activity, in accordance with an itemisation provided by the law. The financial sector has now been liberalised for foreign investments. There is the legal requirement of the registration of the foreign investments, even if under a simplified procedure. There are no limitations as to the payment of dividends or profits and as to the repatriation of capital.
3.1.- As we can deduct from what I have presented, Argentina, Brazil and Mexico have greatly liberalised the legal treatment of foreign capital, as well as the respective monetary policies. The greatest liberalisation occurred in Argentina, not only in terms of the dollar peg, but also in the elimination of restrictions to foreign capital, as well as in the broadest privatisation programme of Latin America. With the benefit of hindsight, the initiatives brought a disastrous effect on the local economies, with major balance of payment crises and a dramatic loss of competitiveness in the international markets.
3.2.- Brazil has been, by far, the largest recipient of foreign direct investments in the area and notwithstanding is largely perceived as being at the threshold of a balance of payment crisis as well. More than 50 million people in the country live under the poverty line. Trade, investment, monetary and trade liberalisation brought increased unemployment and a reduced participation in international trade.
3.3.- Mexico has further aligned its economy to that of the USA and now depends for 90% of its bilateral trade on the commerce with this country, exporting mostly low value-added consumer products from its maquilladoras, without achieving any significant, if any, surplus in its balance of trade. The remittances of the Mexican workers abroad have equalled those of foreign direct investments. In the past 10 years, industrial salaries in Mexico decreased from about US$ 110 to approximately US$ 70 a month. Not less than 8o% of the country’s population live now beneath the poverty line and there is an annual deficit of circa 200 thousand jobs.
3.4.- In all countries, we have seen that the increased dependence on foreign currency has had devastating effects on the social profile. Where the dependence is greatest, Argentina, the situation is worst. Mexico has had to rely on the continuing misery of the population in order to maintain the current model and its trade competitiveness. Argentina, after the end of the cycle of foreign investments, followed by that of the loans from the international voluntary markets, now depends on handouts from multilateral organisations.
3.5.- Brazil, on the other hand, even if still receiving large amounts of foreign investments (about US$ 20 billion are expected in 2001), will not stave-off a balance of payment crisis, sooner or later. It is so because in the current model, every invested dollar will bring about at least 4 dollars in debt. The debt will became unserviceable. With the mounting foreign currency debt and flat trade balances, foreign investments will dry-out, followed by foreign loans. Thus have the cycles of foreign investments invariably finished in the region and this time will be no exception.
3.6.- When will we learn!