Zero-Deficit tax law draws protest
Argentina has decided to go for the jugular to fight its crippling economic crisis. The latest reform introduced in July, the Zero-Deficit Law, caps public spending at available funds. This will be achieved by cutting the salaries and pensions of government workers from 13% to 20%, with the possibility of reaching a reduction of more than 40% in salaries.
This law has federal status and supercedes any preexisting laws and rights. It calls for an increase in financial transaction tax from 0.4% to 0.6%, as well as a 4% increase in social security contributions from 16% to 20%. The value added tax law will also be modified to allocate tax debits and credit based on when payments are made. Other measures include the postponement of benefits for income tax and petrol tax, and the amendment of the federal code of civil procedure which prohibits actions that may affect public resources. Companies with more than 40 employees will be penalized with a 4% payroll tax increase, upping it to 20%.
The Zero-Deficit law is one of Economy Minister Domingo Cavallo’s latest attempts to slash federal spending and achieve a balanced budget, rewarded recently when the International Monetary Fund (IMF) announced an $8 billion rescue package in August. The IMF stipulated in the agreement with Argentina that provincial governors must adhere to the Zero-Deficit law.
Under current law, Argentina’s provinces must split $1.364 billion of federal revenue (co-participation payments), regardless if federal tax collections are unable to meet this amount every month. Delinquent and delayed co-participation payments mean the provinces of Buenos Aires and Formosa have been forced to issue low-interest bearing bonds to pay governments workers. The governments of Jujuy and La Pampa asked the Supreme Court to force the federal government to continue the federal revenue sharing co-participation payments at current levels or they will also issue their own negotiable bonds to pay government workers. The IMF loan stipulates that President De la Rua and Economy Minister Domingo Cavallo must submit a new law to Congress governing the co-participation payments to the Argentine provinces (see Signed & Sealed, “Argentina Gets Creative“).
Argentina renders bank deposits untouchable
Argentina’s senate approved a bill in August that prevents the government from issuing debt against bank deposits. Supporters of the bill hope to prevent Argentines from cashing out deposit accounts and converting them to dollars. The bill is waiting to be signed by President Fernando de la Rua. Bank deposits rose slightly in September after falling nearly 10% in July.
Multinationals upset over Venezuelan oil bill
Venezuela proposed a new hydrocarbons bill in September that threatens to deter foreign investment in Venezuela’s energy industry. The hydrocarbon bill calls for an increase in royalty tax payments from 16.6% to 30%, which is considerably higher than other countries. Saudi Arabia charges a 20% royalty tax, Nigeria’s tax is between 0% and 20% and countries such as Norway, Qatar and the United Kingdom have eliminated royalty tax payments altogether.
The bill also requires Venezuela’s national petroluem company, Petroleos de Venezuela SA (PDVSA), to take a minimum 51% stake in any shared projects. The new law is not expected to affect the terms and conditions of any existing projects (see Signed & Sealed, “Orinoco No Flow“).
Ecuador’s President initiates reform
Ecuador’s president, Gustavo Noboa presented a new reform bill to Congress in August. The legislation proposes the creation of two legislative chambers and will allow his successors one-time powers to dissolve Congress and call immediate elections.
Ecuador debates social security program
Ecuador’s congress is currently debating the controversial legislative proposal to partially privatize the state-run social security system. Ecuador’s president Gustavo Noboa vetoed a law passed by congress in June that maintained state control over pensions. Noboa is keen to craft a partially privatized social security system in Ecuador.
Brazil and the US do war over patent
Brazil hailed a victory against Swiss pharmaceutical company Roche after the dispute over patent rights for AIDS drugs came to an end. Brazil threatened to violate the patent of the AIDS drug nelfinavir, manufactured by Swiss pharmaceutical company Roche, if the company did not cut prices by at least 40%. Brazil said it could produce nelfinavir in a state laboratory for 40% less than if bought from Roche. Under intense pressure from non-governmental organizations and humanitarian groups, Roche relented and agreed to the price cut. In March, Brazil threatened to break the patent on two AIDS drugs manufactured by US pharmaceutical company Merck and begin local production. Merck also relented and cut prices on the two drugs by 65% and 59%.
The dispute arose last year when the Brazilian government, unable to afford the hefty prices of AIDS treatment drugs sold by foreign pharmaceutical companies, turned to the law for help. Brazil adopted a loose interpretation of Article 68 of its intellectual property law, which states that a product must be produced locally as a condition for granting a patent in Brazil. But if the condition is not met within three years, Brazilian law allows the government to issue a compulsory license to manufacture, including patent-protected products owned by foreign drug companies.
In response, the US filed a complaint with the World Trade Organization (WTO), citing that Article 68 was incompatible with the WTO’s Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement. But the US withdrew the WTO complaint in June. Instead, the two countries transferred the dispute from the WTO to the newly formed US-Brazil Consultative Mechanism.
Colombia improves corporate governance
Colombia’s securities market regulator, the Superintendency of Securities, issued a new resolution (0275) that changes the minimum requirements on pension fund investment in May. According to Resolution 0275, if public or private entities wish to receive investments from pension funds, they must guarantee the protection of all shareholders’ and investors’ rights.
They must also adopt measures to ensure that minority shareholders can: evaluate and control the pension fund administrators activities, prevent and disclose any conflicts of interest, hold transparent elections for fiscal auditors, and recognize when a shareholders’ meeting should be called to protect their rights if necessary. It also decrees that the minority shareholders may audit any of the respective entities.
The passing of Resolution 0275 marks a major step forward in Colombia’s quest for greater transparency in corporate governance standards and the protection of minority shareholders’ rights. The entities governed under this resolution are required to provide accurate information to the public regarding the financial status of their corporation’s employees and detailed reports from external audits.
Resolution 0275’s corporate governance standards will form the Codigo de Buen Gobierno (Good Governance Code), which will be readily available to shareholders and investors.
New legislation from Monetary Council
The Brazilian Monetary Council created the Agente Autonomo de Investimento (independent investment agent) for the domestic capital markets in June. This agent plays the role of an individual or legal entity formed by authorized professionals to distribute and broker instruments, securities, shares of investment funds and derivatives under the supervision of a licensed party that is linked to the Brazilian securities distribution system. Organizations that use an independent agent include stock exchanges, companies that buy securities in the open market and resell them on their own behalf, financial institutions that distribute securities as agents of the issuing company, or companies subscribing to or buying securities for market placement purposes. Any independent investment agent must be certified by the Brazilian securities and exchange commission.
Chile introduces labor law reforms
Chile’s president Ricardo Lagos introduced a new labor reform bill in an effort to foster free trade agreements with the US and European Union. The controversial reform bill, introduced in September, reduces the hours employees work and attempts to combat abuses by work supervisors. The bill seeks to reduce the working week from 48 hours to 45 hours and protects employees from unsubstantiated dismissals. Part-time and seasonal workers will also receive increased protection rights.
Chile rules against discrimination
Chile amended Article 2 of the Labor Code (Law 19,739) in July prohibiting discrimination, exclusion, or preferential treatment based on age or civil status. The law bars employers from hiring workers based on these criteria.
The application and hiring processes are also prohibited from requiring any of the above criteria of the employee, except when they are necessary requirements of the job. There is no specific penalty for the breach of this amendment. But the penalty for infringement of Article 477 of the Labor code, where the guilty party may be penalized with a fine of up to 10 monthly tax units of $450, will be applied to the Article 2 amendment. Discrimination based on race, color, gender and membership of a trade union, religion, political opinion, nationality or social origin is currently illegal according to Chilean law.
Panama seeks to increase e-tail
Panama adopted a new set of rules that governs electronic documents and signatures and the issuance of certificates of identification in August. The legislation is intended to provide protection for parties involved in internet transactions as well as fax, telex and telegrams. The government hopes that increased security and protection laws will expand the use of online commerce in Panama.
Venezuela signs tax treaty
Venezuela and Demark signed a treaty to avoid double taxation and tax evasion in July. The Double Taxation Treaty (DTT) is modeled on the general OECD treaty and other treaties signed by Venezuela. Under the new treaty the maximum tax rates in the source country are lowered to 5% for dividends paid by a subsidiary to its parent company as long as the parent company holds 25% of the company’s corporate capital and a 15% maximum tax in all other cases. They are also lowered to 5% if interest income on credits granted or guaranteed by Venezuela and Denmark are tax-exempt in the country where the interest has accrued. The DDT becomes effective as of January 2002.