VII. Investment Climate A. Openness to Foreign Investment Trends and Opportunities: Guatemala is also an attractive site for foreign investors. Close to the United States, Guatemala possesses a large labor pool and enjoys preferential access to the U.S. market through the Caribbean Basin Initiative (CBI) and Generalized System of Prefernces (GSP). Recently the u.S. government propsoed new legislation to the u.S. Congress that would enhance the CBI program. The Interim Trade Program (ITP) would grant further trade concessions, primarily in the textiles area. In return for NAFTA-like treatment for textiles and other miscellaneous items to the Caribbean Basin nations, hte ITP would require the commitment of the Caribbean Basin countries on a bilateral basis to make commitments mainly in the following areas: bilateral investment treaties, intellectual property rights, workers rights, and the environment. In August 1994, the Interim Trade Program bill was still in Committee in the House of Representatives and Senate. Because of these programs, and good agricultural conditions, nontraditional exports have enjoyed very healthy growth over the last decade. Accordingly, good investment possibilities exist in businesses devoted to garments, flowers, and winter vegetables such as broccoli, and snow peas. B. Conversion and Transfer Policies Government Policy/Attitude: In addition to maintaining a stable macroeconomic environment, the De Leon Administration actively welcomes foreign investment. Foreign investors are generally afforded national treatment and face very few formal constraints on investment. Most of the restrictions, requirements and approval mechanisms typically found in such laws do not exist in Guatemala; e.g there is no general requirement for local participation nor any restrictions on repatriation of capital. However, foreign companies must comply with significantly more protracted registration procedures than those faced by a Guatemalan firm. All firms wishing to operate in Guatemala must formally incorporate here, publish their intent to conduct business and register with the Ministry of Economy. Foreign firms must meet these same conditions, demonstrate solvency, and solicit the approval of the Ministry of Government and the Attorney General's Office. As a result, foreign companies face a delay of at least nine months whereas local companies usually receive provisional approval to begin operations within a few weeks. Although these additional requirements present a significant delay, they are not used specifically to screen or discriminate against foreign companies. The government is attempting to consolidate registration procedures in a one- stop-shop for investors but some legislative changes will be necessary before the registration of foreign companies can be measurably streamlined. C. Regulatory Framework: Guatemala has taken several steps to streamline the regulatory process. Nonetheless, bureaucratic hurdles are common for both domestic and foreign companies wishing to operate in Guatemala. Not infrequently, companies are subject to ambiguous requirements, applied inconsistently by different government agencies. Regulations - where they exist - often contain few explicit criteria for the government decision maker, creating uncertainty. Public participation in the promulgation of regulations is rare and there is no consistent judicial review of administrative rule making. Customs administration is particularly problematic, with inconsistent classification and valuation of imports, frequent delays at the border and widespread corruption. D. Environmental Regulation: The framework environmental law in Guatemala, Decree 68-86, requires that an environmental impact assessment be reviewed by the government environmental agency, CONAMA, prior to the initiation of any project that might negatively affect the environment. However, CONAMA has yet to promulgate regulations pursuant to Decree 68-86, creating some uncertainty as to what constitutes a violation of the law. The preparation and content of the EIAs is inconsistent, and CONAMA does not always have the necessary expertise to review them adequately and expeditiously. Some businesses, have complained that significant delays can occur in getting CONAMA's approval to begin a project. About a quarter of the national territory has been designated a protected area. The government conservation group, CONAP, charged with managing these areas, can grant timber and other concessions so long as those concessions are consistent with the master plan for the protected area. Managing the forests outside the protected areas falls to DIGEBOS, the rough equivalent of the US Forest Service, under the Ministry of Agriculture. Two other agencies under the Ministry of Agriculture have responsibility for phyto- and zoo-sanitary issues; A plant health agency, DIGESA, and a animal health agency, DIGESEPE, serve roughly the same functions as APHIS and FSIS for the US Department of Agriculture. The majority of Guatemala's plant and animal laws are based on US laws, although their laws are not usually quite as strict. All pesticides, herbicides, fungicides, and rodenticides must be registered with DIGESA before they can be used in Guatemala. The law and regulations covering the importation, production, storage, transport, sale and use of these agrochemicals are fairly extensive. However, the US FDA has barred or delayed the import of some Guatemalan agricultural products into the United States due to unacceptable pesticide residues. E. Labor Laws and Rates: The minimum wage and maximum weekly working hours are established by law and are revised periodically. The labor code provides the right to organize employee associations and labor unions. Most labor unions are in the public sector, although private sector unionization has increased recently. Unions remain relatively weak, with less than 1 in 14 workers belonging to a union. By law, at least 90 percent of any company's work force must be Guatemalan and no company operating in Guatemala can spend more than 15 percent of its total wage bill on non-Guatemalan employees. The labor code also specifies employer responsibilities for working conditions, benefits, safety standards, severance pay and bonuses. Employers are required to pay a bonus equivalent to a month's salary in July and again in December. The law establishes a two month probation period. If dismissed after more than two months employment, employees receive separation pay equal to one month's salary for each year worked. Employers are required to make a contribution for social security. In total, these required benefits raise the average wage bill by 62 percent. F. Bilateral Investment Agreements In October 1991, the United States and Guatemala signed a Framework Agreement on Trade and Investment, establishing a binational Trade and Investment Council. The Council is designed to discuss general issues related to trade and investment. The government is studying a draft bilateral investment treaty proposal by the United States. Guatemala has also signed investment agreements with the Republic of Korea, Germany and Taiwan. Guatemala is party to a number of other bilateral agreements that partially deal with investment issues. The Overseas Private Investment Corporation (OPIC) is active in Guatemala, providing both insurance and investment financing. Obtaining Foreign Government Approval (FGA) for OPIC applicants can be slow but the government hopes to speed the process by incorporating it into the one-stop-shop for investors. Guatemala has also recently joined the Multilateral Investment Guarantee Agency. G. Investment Disputes The Government of Guatemala has not been party to any major investment disputes in the recent past. Under Guatemalan law, all investment or contract disputes with the government fall under the jurisdiction of an Administrative Dispute Court. Guatemala has signed the New York Convention on the Enforcement of Foreign Arbitral Awards and the Interamerican Convention on Arbitration (the Panama Convention). Guatemala has not, however, enacted any special procedures for dealing with international arbitration clauses or awards under the New York Convention, or with international arbitration generally. Guatemala does not belong to the World Bank International Center for the Settlement of Investment Disputes (ICSID). The standard procedures for enforcing agreements are clumsy and poorly implemented. Theoretically, Guatemalan procedures are not much different from those of the United States. In practice, however, Guatemalan procedures are less transparent and more time- consuming. The time required to complete these procedures can be significant and Guatemala does not allow the parties to proceed to arbitration or obtain a default award until those procedures are completed. The government has committed to streamline these procedures and to make them consistent with the New York and Panama Conventions. The local Chamber of Commerce is establishing an arbitration center to mediate both foreign and domestic disputes. The procedures for enforcing foreign awards are even more cumbersome. The party against whom enforcement is sought can raise a number of procedural objections through the judicial process, in a manner that is inconsistent with the New York Convention. The Constitution guarantees prompt compensation for any expropriation and specifically prohibits confiscatory taxation. The government has taken no expropriation actions since the 1950s and we do not foresee any expropriations in the future. H. Tax Treaty with the United States Article 24 of the Constitution provides strict inviolability of a person or companies' correspondence, documents and books. As a result of this constitutional provision, the Government of Guatemala believes it is precluded from entering into a tax information exchange agreement or mutual legal assistance treaty with the United States or other country. I. Business and personal taxation The government adopted a sweeping tax reform in 1992, simplifying most taxes on businesses operating in Guatemala. Most exemptions to the 7 percent value added tax were eliminated. The band of import tariffs was lowered and narrowed so that most tariffs now fall between 5 and 20 percent. Personal income taxes were simplified to just three brackets varying between 10 and 25 percent. A flat 25 percent corporate income tax was also adopted. A 12.5 percent tax is also levied on remittances of dividends. The government provides incentives for forestry, mining, tourism and petroleum investments. Property owners who engage in reforestry can qualify for a real estate tax exemption and can deduct the costs of these activities from their income taxes. In petroleum, 100 percent of the exploration and exploitation expenses are recoverable. Petroleum investors are eligible for tax free imports of most inputs for 5 years, suspension of duties without bond on items to be re-exported and the maintenance of foreign currency deposits outside the country. Mining and renewable energy projects qualify for duty-free imports for goods that are not produced locally. Imports of capital goods used in hydro-electric, but not thermo-electric, generation may be made duty free. Firms that carry out development projects in designated tourist zones receive real estate tax exemptions. Investors in tourism are also exempt from all import duties on goods not produced in Central America. J. List of Major U.S. Investors With cumulative US investment estimated to be at least $600 million in more than 200 enterprises, U.S. companies accounting for the majority of foreign investment in Guatemala. These investors include: Abbott Laboratories AT&T Colgate Palmolive Upjohn Pharmaceuticals IBM Proctor and Gamble Kellogs United Airlines American Airlines Continental Airlines Ralston Purina ENRON Corporation Texaco ESSO Sealand American Express National Car Rental Citibank DHL Pepsi Coca-Cola Gillette