Southern Common Market, MERCOSUR

Convención 1366 Piso 4                                
Edif. Galería Caubarrere
Montevideo 11100                                      
Uruguay 
Telephone: +598 - 2 - 901 - 5556  
Facsimile: +598 - 2 - 902 - 3655  
E-Mail: comisec@adinet.com.uy 
Internet:   www.comisec.gub.uy
www.idrc.ca/lacro/investigacion/mercosur.html

Member countries
Historical background
Objectives
Institutional structure
Trade opening programme
Summary of Agreements
Treaty of Asucion
Protocol of Ouro Preto

Member countries

Comprising Argentina, Paraguay, Uruguay and Brazil, the Southern Common Market - MERCOSUR represents a total population of 190 million individuals, living in an area larger than the total surface of the european continent, covering more than 12 million square kilometers. In 1993, the total Gross Domestic Products (GDP) of these four nations was approximately US$ 715 billion. Brazil has a territory of 8.5 million square kilometers and 155 million inhabitants, as well as the largest economy within MERCOSUR. Argentina, the second largest MERCOSUR nation, has 2.8 million square kilometers in area. The Argentine economy has been one of the fastest growing in the last few years. Paraguay, with 406 thousand square kilometers and a population of 4.6 million, has a growing economy. Uruguay in turn has the smallest population, calculated at some 3.1 million inhabitants, and the smallest territory in MERCOSUR - 177 thousand square kilometers.

Historical background

ALALC

A short while after the creation of the European Coal and Steel Community (1954) and the European Economic Community (1957), Latin America was already beginning to take its first steps towards regional integration. The treaty that created the Latin American Free Trade Association (ALALC), signed in 1960, provided for the creation of a free-trade zone, by means of periodical and selective negotiations between its member states. This choice-negotiation at the discretion of the member states rather than automatic reduction of import duties--made the ALALC trade opening program develop reasonably well in its first years, lose Impetus as of 1965, and almost come to a complete standstill in the 70's. Thus, despite its having stimulated mutual trading between member states, the distance between its original objectives and the results obtained was very great.

ALADI.

The Latin American Integration Association, created in 1980 to replace ALALC, used other means to attempt member state integration. In place of the free-trade zone established by ALALC, an economic preference zone was established creating conditions favorable to the growth of bilateral initiatives, as a prelude to the institution of plurilateral relationships in Latin America. ALADI thus made possible agreements and Joint actions between countries In the region which until then had only limited previous ties. The establishment of a common market, however, was still the long-term objective.

MERCOSUR

Under the ALADI system Brazil and Argentina signed in 1986 twelve commercial protocols: their first concrete step towards the bringing of the two countries closer together that had officially been started in 1985 under the Declaration of Iguaçu. To supplement and improve on their former agreements, Brazil and Argentina signed in 1988 a Treaty for Integration, Cooperation and Development that set the stage for a common market between the two countries within ten years, with the gradual elimination of all tariff barriers and harmonization of the macroeconomic policies of both nations. It was further established that this agreement would be open to all other Latin American countries.

After the adhesion of Paraguay and Uruguay a new treaty was signed by all four countries on March 26, 1991 In Asuncion, Paraguay, providing for the creation of a common market among the four participants, to be known as the Southern Common Market (MERCOSUR). Bolivia, Chile, Venezuela Colombia and Peru have already evinced interest in joining MERCOSUR. Other Latin American countries interested in joining that are ALADI members can initially do so through association agreements with member nations, which can be extended until full participation in formation and conduct of a common market has been achieved. Negotiations with Chile to gradually reduce its trade tariffs vis-à-vis MERCOSUR nations are well advanced. One of the major problems however with Chile's entry into MERCOSUR is the offshore tariffs that Chile imposes at a flat 11% rate; other MERCOSUR nations have rates ranging from zero to 20%.

Objectives of MERCOSUR

Institutional structure

The Asuncion Treaty and Ouro Preto Protocol established the basis for the institutional MERCOSUR structure, creating the Common Market Council and the Common Market Group, both of which are to function at the outset of the transition phase. As provided for in this Treaty, before establishing the common market the member nations must call a special meeting in order to determine the definitive institutional structure for the public agencies managing MERCOSUR, as well as define the specific functions of each agency and the decision making process.

Common Market Council

Functions: The Council is the highest-level agency of MERCOSUR with authority to conduct its policy, and responsibility for compliance with the objects and time frames set forth in the Asuncion Treaty. Composition: The Council is comprised of the Ministers of Foreign Affairs and the Economy (or the equivalent) of all four countries. Member states preside over the Council in rotating alphabetical order, for 6-month periods. Meetings: Councilmembers shall meet whenever necessary, but at least once a year. The presidents of the member nations shall partake of the annual Common Market Council meeting whenever possible. Decision Making: Council decisions shall be made by consensus, with representation of all member states.

Common Market Group

Functions: The Common Market Group is the executive body of MERCOSUR, and is coordinated by the Ministries of Foreign Affairs of the member states. Its basic duties are to cause compliance with the Asuncion Treaty and to take resolutions required for implementation of the decisions made by the Council. Furthermore, it can initiate practical measures for trade opening, coordination of macroeconomic policies, and negotiation of agreements with nonmember states and international agencies, participating when need be in resolution of controversies under MERCOSUR. It has the authority to organize, coordinate and supervise Work Subgroups and to call special meetings to deal with issues of interest. Composition: The Common Market Group shall be made up of four permanent members and four alternates from each member state, representing the following public agencies: (i) the Ministry of Foreign Affairs; (ii) the Ministry of the Economy, or the equivalent (from industry, foreign affairs and/or economic coordination); and (iii) the Central Bank. The members of the Common Market Group appointed by a given member state will constitute the National Section of the Common Market Group for that particular nation. Meetings: The Common Market Group will meet ordinarily at least once every quarter in the member states, in rotating alphabetical order. Special meetings may be freely called at any time, at any previously scheduled place. The meetings will be coordinated by the Head of the Delegation of the host member state. Decision Making: Common Market Group decisions shall be made by consensus, with the representation of all member states. Language The official MERCOSUR languages will be Portuguese and Spanish, and the official version of all work papers will be prepared in the language of the country hosting the meeting.

Administrative Office and Socioeconomic Advisory Forum

The Administrative Office will keep documents and issue the MERCOSUR official bulletin in both Spanish and Portuguese, and will also be charged with communicating the activities of the Common Market Group so as to allow for the maximum disclosure of decisions and the relevant documentation. The Socioeconomic Advisory Forum is consultative by nature, and represents the various socioeconomic sectors of the member nations.

Work Subgroups

Functions: Directly subordinated to the Common Market Group, the Work Subgroups draw up the minutes of the decisions to be submitted for the consideration of the Council, and conduct studies on specific MERCOSUR concerns. Currently, the Work Subgroups are the following: Commercial Matters; Customs Matters; Technical Standards; Tax and Monetary Policies Relating to Trade; Land Transport; Sea Transport; Industrial and Technology Policies; Agricultural Policy; Energy Policy; Coordination of Macroeconomic Policies; and Labor, Employment and Social Security Matters. Meetings. The meetings of the Work subgroups will be held quarterly, alternating in every member state, in alphabetical order, or at the Common Market Group Administrative Office. Activities will be carried out by the Work Subgroups in two stages: preparatory and conclusive. In the preparatory stage, the members of the Work Subgroups may request the participation of representatives from the private sector of each member state. The decision-making stage is reserved exclusively for official representatives of the member states. Representatives from the Private Sector. The delegations of representatives from the private sector in the preparatory stage of the Work Subgroup activities will have a maximum of three representatives for each member state directly involved in any of the stages of the production, distribution or consumption process for the products that fall within the scope of the subgroup's activities.

Joint Parliamentary Committee

Functions: The Committee will have both an advisory and decision-making nature, with powers to submit proposals as well. It will be competent, inter alia, to: Follow up on the integration process and keep the respective Congresses informed; Take the necessary steps for the future instatement of a MERCOSUR parliament; Organize subcommittees to examine matters relating to the integration process; Submit its recommendations to the Common Market Council and Group as to how the integration process should be conducted and MERCOSUR formed; Make the adjustments necessary to harmonize the laws of the different member states and submit them to the respective Congresses; Establish relationships with private entities in each of the member states, as well as international agencies and bureaus so as to obtain information and specialized assistance with matters of interest: Establish relationships targeting cooperation with Congresses of the nonmember nations and entities involved in regional integration schemes; Subscribe to cooperation and technical assistance accords with public and/or private entities whether domestic, supranational or international; and Approve the budget, lobbying vis-à-vis the member states for other financings. Composition: The Committee will be composed of a maximum of 64 acting parliamentary members, 16 per member state, and an equal number of alternates, appointed by the Congress to which they pertain, and with a term of office of at least two years. The meetings shall be conducted by a directors' board consisting of four Presidents (one for each member state). Meetings: The Committee will ordinarily meet twice a year, and extraordinarily whenever summoned by any of its four Presidents. Meetings are to be held in the territory of each member state on a successive and alternating basis. Decision Making: Meetings of the Joint Parliamentary Committee will only be valid when attended by parliamentary delegations from all member states. Decisions by the Joint Parliamentary Committee will be made by consensus vote of the majority of the members accredited by the respective Congresses of each member state. Language: Portuguese and Spanish are the official languages of the Joint Parliamentary Committee.

Trade Commission

Functions: The Trade Commission will assist the MERCOSUR executive body, always striving to apply the instruments of common trade policy agreed to by the member states for operation of the customs unification. Additionally, the commission should also follow up on the development of issues and matters related to common trade policies, the intra-MERCOSUR trade and trade with other countries. Composition: The commission will have four actual members and four alternates, with each member nation's indicating a member. Purpose: The Trade Commission shall exert every effort to apply common trade policy instruments such as: Trade agreements with other countries or international entities; Administrative/commercial product lists; Final adaptation system for MERCOSUR customs unification; Origin system; Free-trade zone system, special customs areas and export processing zones; System to discourage unfair trade practices; Elimination and harmonization of tariff restrictions; Nonmember country safeguard systems; Customs coordination and harmonization; Consumer protection systems; and Export incentive harmonization. Furthermore, the trade commission should speak out regarding the issues raised by the member states regarding application and compliance with common offshore tariffs and other common trade policy instruments. Meetings: The commission shall meet at least once a month, as well as whenever asked to by the MERCOSUR executive agency or by a member state. Decision Making: The commission can take decisions entailing administration and application of trade policies adopted under MERCOSUR, and whenever necessary submit proposals to the executive body regarding regulation of the areas under its authority; additionally, it can propose new guidelines or modify those in existence in MERCOSUR trade and customs matters. In this respect, the trade commission can propose a change in the import duty on specific items under common external tariffs, including cases referring to development of new MERCOSUR production activities. In order to better achieve its objectives, the trade commission can create technical committees targeting direction and supervision of the work it engages in. It can also adopt internal operating regulations. Proposals and decisions of the trade commission will be taken by a consensus of the representatives indicated by each member nation. Dispute Resolution: Any disputes ensuing from the application, interpretation or compliance with the acts issued by the trade commission are to be referred to the MERCOSUR executive body, and should be resolved using the directives set forth in the Dispute Resolution System adopted under MERCOSUR.

Trade opening programme

Mechanism

The trade opening program targeted the end of duty and other nontariff restrictions on trading between Argentina and Brazil by December 31, 1994, and by December 31, 1995 for trade with Uruguay and Paraguay. Duty includes customs rights and any tariffs on foreign trade, whether fiscal, monetary, exchange or otherwise, other than charges and like measures corresponding to the approximate cost of services rendered. Nontariff restrictions are any measures taken unilaterally by a member state to impede or hamper mutual trading. These do not include any measures taken as a result of the situations provided for in article 50 of the 1980 Montevideo Treaty (trading of gold, silver, armaments and radioactive products, and protection of life, health, moral principles, and the historical and artistic heritage).

Lifting of Duty

The lifting of import duty is the object of a progressive, direct and automatic project that will benefit all products subject to tariffs in member states, according to the following schedule:

Application Basis

The lifting of tariffs was applied to tariffs in effect, and represents an easing of the more favorable tariffs on import of products from countries not participating in ALADI. In the event any of the member states increases the tariffs in force on January 1, 1991 on imports from nonmember countries the schedule will continue to apply to the original tariffs. In the event of common tariff reductions, the reductions will automatically apply to the other member states, on the date such reductions take effect.

List of Exceptions

This general lifting of duties and other nontariff restrictions in the member state trading does however allow each nation to have a list of exceptions considered ''sensitive''.(l) Products included on these lists are initially excluded from the schedules for trade opening. These exceptions will be reduced at the end of each calendar year. Based on this schedule, Brazil and Argentina will discontinue their exceptions lists by December 31, 1994, and Paraguay and Uruguay will discontinue their lists by December 31 1995.(2) The establishment of exceptions by the Asuncion Treaty signatories seeks to ensure that such nations offer their most important production sectors a longer term as from 1995 for adapting to the new unrestricted trade interchange under MERCOSUR (3). In addition to the exceptions lists, various systems such as the capital goods systems have been established, whereby products must be brought into keeping with TEC as of January 1, 2005, and the computer science and telecommunications goods systems which have until January 1, 2006. Moreover, a 20% charge for interzonal and extrazonal import duties has been established for the sugar cane sector, and it was as well decided that specific import duties for merchandise in the textile and footwear sectors will only take effect until December 31, 1995. A technical committee was also created to prepare a proposed common automotive vehicle system, which should include a total listing of controls on intrazonal trade and TEC, with no incentives whatsoever regarding vehicle import for parts and accessories for terminals and parts producers.

Agreements

Under the Scope of ALADI

The rules established in the trade opening program will not apply to Partial Agreements for Economic Supplementation Nos. I (signed between Brazil and Argentina), 2 (between Brazil and Uruguay), 13 (Brazil and Venezuela), and 14 (Argentina and Brazil), nor to any agricultural and commercial agreements signed within the scope of ALADI that will be governed exclusively by the provisions thereof. All other partial agreements executed between the member states under the aegis of ALADI will be examined under a special program for the lifting of import duty, the schedule for which also provides for the complete abolishment of all customs taxes by December 31 1994. (1)Products being adapted will be subject to tariffs for domestic imports, and not included in the free-trade zone, whose tariffs are 0% for all member states. This adaptation period will end in four years. (2)The Brazil/Argentina exception lists contain 232 items; Paraguay, 253; and Uruguay, 212. The member nations can supplement their national exception lists until April 30, 1995 (for Argentina, Brazil and Uruguay the limit is 300, and for Paraguay, 399). (3)With implementation of a common external tariff (TEC), it was initially possible to set a 0% TEC for only 20% of the products, within the flat 85% product tariff rate.

Safeguard Clauses

Scope

Should the import of a certain product damage or seriously threaten the domestic market as a consequence of a substantial increase in the import of this product from other member states during a certain period of time, the importer may exceptionally negotiate an import quota (maximum price or quantity) for the product it wishes to protect. This product will also benefit from the lifting of duty and other conditions established in the program for the opening up of trade. Under the trade opening program, damage or threatened damage will be determined on the basis of examination of a variety of aspects, including production levels and use capacity, employment levels, market share, extent of trade between the nations involved, and the performance of imports/exports in relation to nonmember states.

Conditions of the Quotas.

The abovementioned quota will be negotiated with the member state of origin of the imports within 30 days. Should the parties not reach an agreement within the established time frame, the importer may establish a quota which will be maintained for one year, and may be extended for another like period. The quota unilaterally established by the member state may not be less than the average actually imported in the last three calendar years. The safeguard clauses will only be used once for each product, and in no event will they apply after December 31, 1994.

Free Trade Zones

Scope

The member nations can have commercial free-trade zones, industrial free-trade zones, export processing zones, and special customs areas, all of which target providing merchandise marketed or produced in these areas with treatment different from that afforded in their respective customs territories.

Tariffs

The member states can assess merchandise from these areas with the common external tariff used for MERCOSUR merchandise, or, in the case of certain special products, the domestic tariff prevailing in each individual state. In this way, the products from the free-trade zones can have the more favorable tax treatment established under MERCOSUR, given to the merchandise produced in the normal customs zones of each member state or, in the case of certain special products, can have the normal customs treatment prevailing in each nation.

Safeguards

Products produced or marketed in the free-trade zones of each member nation will be eligible for the safeguard system whenever this entails an increase not provided for in imports, but capable of causing damages or threatened damages to the importer country.

Incentives

In the event of the producing nation's granting special incentives for production from the free-trade zones that are not compatible with the corresponding guidelines established under the General Agreement on Tariffs and Trade - GATT, the member nation can make any adjustments needed to return the situation to equilibrium.

Creation of Free-trade Zones

The member nations agreed that any free-trade zones that in August 1994 were already in operation could operate normally under MERCOSUR, along with any that are set up in light of legal guidelines prevailing or in course in Congress during this same time period. This means that a member nation can no longer create new free-trade zones that are more privileged.

Manaus and Tierra del Fuego Free-trade Zones

The actual implementation of MERCOSUR will not affect the special Manaus, Brazil, and Tierra del Fuego, Argentina, free-trade zones organized in light of their special geographic situations. These two free-trade zones may continue normal operations until 2013.

General Origin Regulations

Definition

In order for a product to benefit from the trade opening program, and to enjoy the program privileges, its country of origin must be one of the member states.

Original Products

The following products are considered originating from the member states: Any products that are developed in the territory of any member state, with 60% of the materials originating from member states (4) Any products that are developed with materials that do not come from the member states, but that as a result of a transformation process carried out in the territory of any member state are given new characteristics which position them under a different classification from the materials mentioned in ALADI's List of Products. Up to December 31, 1994, any products resulting from packaging or assembly processes carried out in the territory of one member state using materials from other member states and nonparticipant countries, whenever the value of the original materials is more than 40% of the FOB export value of the final product; Any products provided for in the chapters or positions of ALADI's List of Products that are featured in Exhibit I of Resolution No.78 of the ALADI Committee of Representatives, for the simple reason that they are produced in their respective territories; and Any products which, in addition to being produced in their respective territories, fulfill the specific requirements established in Exhibit 2 of Resolution No. 78 of ALADI's Committee of Representatives.

Representations and Certificates

In order that the import of products originating from the member states may be exempted from customs duty and restrictions, as agreed on thereby, the export documentation for said products must state that they have satisfactorily met the requirements necessary to be classified as "original products". This statement will be made by the product's final producer or exporter, and certified by an official authority or private entity especially appointed therefor by the Executive Branch of each member state. The certificate of origin will, at the latest, be issued by the date of shipment of the product under the program, and be valid for 180 days. (4) Products traded by the MERCOSUR nations at 0% tariff must have a nationalization index of 60%, except for capital goods, whose level should be 80%. Uruguay has the benefit of the provenance rule, and a nationalization index of only 50% is permissible until 2001.

Securities Market

Freedom to Invest

Individuals or legal entities that are resident or domiciled in MERCOSUR countries were authorized to invest on Brazilian stock exchanges under CMN Resolution 1968/92. MERCOSUR investors may freely trade on the securities market, without having to operate through an investment fund or portfolio, as is the case of other foreign investors. Likewise, individuals and legal entities that are resident or domiciled in Brazil are authorized to invest on the stock exchanges of the other MERCOSUR member countries.

Restrictions

The only restrictions on transactions under MERCOSUR are the following: Investors must be domiciled or headquartered in the nation where the investment originates; Companies issuing the securities must be located in any of the MERCOSUR member states; Traded shares and other securities may only be issued as registered securities; Transactions can only be carried out on the spot market; The transactions may only be liquidated on the financial markets of the countries involved in the transaction; The total value of guarantees for investor positions on the options and futures markets cannot exceed the respective investments; and Options and futures market transactions cannot be guaranteed by bank surety, credit insurance or the like.

Currency

Investments may be made in: United States dollars (US$); Currency of the investment's country of origin; and Currency of the investment recipient's country.

Exchange

Investments made in currencies other than the real are subject to an exchange contract. Exchange transactions for funds entering into and leaving Brazil will be carried out at floating exchange rates as provided for in Resolution No. 1552 of December 22, 1988 of the Central Bank of Brazil (tourism dollar).

Central Bank Registration

Investments coming in from abroad and Brazilian investments leaving the country will be registered with the Central Bank of Brazil, even if they are made in reais. Financial transfers to overseas cannot be made in a currency other than the currency in which the investment was registered at the Central Bank of Brazil.

Annex IV Portfolios.

In addition to this mechanism, foreign institutional investors headquartered in any member or nonmember MERCOSUR nation that are interested in investing on the Brazilian stock market can avail themselves of another investment mechanism known on the Brazilian capital market as Annex IV Portfolios.

• Investments made under ANNEX IV, unlike those under MERCOSUR, are eligible for more favorable tax treatment. In effect only dividends earned by ANNEX IV Portfolios will be subject to the 15% withholding income tax. Capital gains are exempt from this tax.

International Real Transfers

Likewise, despite the agreement under MERCOSUR, Brazilian investors can acquire stocks and bonds traded on the international markets--including the Argentine, Uruguayan and Paraguayan stock exchanges--by international transfers of Brazilian currency (reais) made by banks authorized to deal in exchange.

Investment in Share Deposit Certificates - CDAs.

The Central Bank of Brazil and the Securities Commission authorized in 1993 the trading on the Brazilian stock exchange of CDAs representing stock issued by companies headquartered in the Asuncion Treaty signatory countries. This authorization resulted from the privatization of Yacimientos Petroliferos Fiscales Sociedad Anonima - YPF, by placement of YPF shares on the Argentine stock market at the same time as placement on the New York, London, Frankfurt, Zurich, Tokyo and Sao Paulo stock markets.

Basic Regulations of Securities Market - MERCOSUR (CMC/DEC 8/93). These transactions can be either put or call, and made on options or futures markets referenced in securities, interest and exchange rates, when kept by stock exchange or commodities and futures exchanges, provided that this is for the exclusive purpose of hedging to protect the respective securities portfolios.

Controversy Settling Systems

Scope

Any controversies during the transition period (until December 31, 1994) between the member states, or between private individuals and member states, arising from construction, applicability or noncompliance with the provisions of the Asuncion Treaty, or from the agreements executed under its scope, or even from decisions made by the Common Market Council and resolutions taken by the Common Market Group during the transition period, were subject to the settlement procedures listed below. After December 31, 1994, the member states will establish a definitive system for the settlement of disputes.

Direct Negotiations.

An attempt to settle any disputes between member states will first be made through direct negotiations, which will be limited to 15 days as from the date one of the member states raises the matter, unless otherwise agreed to by the parties.

Intervention of the Common Market Group.

If by means of direct negotiations an agreement is not reached between the member states, or if the controversy is only partially resolved, any of the member states may submit the matter for the examination of the which will hear the parties involved in the conflict, Common Market Group, and request outside advice from specialists, if necessary. The Common Market Group will subsequently make its recommendations to attempt at resolution of the the parties involved in an matter. This than 30 days, as of the date the dispute was submitted procedure may take no longer for the consideration of the Common Market Group.

Arbitration

In the event an agreement is not reached through direct negotiations or with the intervention of the Common Market Group, any of the member states may request that the Administrative office of the Common Market Group institute arbitration. Each member nation will defray the expenses for the arbitrator appointed thereby.

The arbitration proceeding will be handled by an ad hoc court that will establish its headquarters in one of the member states, depending on the case, and will follow its own rules in the proceeding, deciding on the dispute based on the provisions of the Asuncion Treaty and the agreements executed thereunder, on the Common Market Council decisions and Common Market Group resolutions, as well as on such international law principles and provisions as are applicable thereto. Court Composition. Each member state will appoint ten arbitrators to be placed on a list to be filed at the Administrative Office of the Common Market Group. Each arbitration court will be composed of three arbitrators taken from this list. Each member state (or two or more member states maintaining the same stance in the controversy) will designate an arbitrator, with the third arbitrator's being selected by mutual agreement of the other two arbitrators (such arbitrator may not be of the same nationality as either of the parties involved in the controversy). This third arbitrator will be the presiding judge. All arbitrators must be jurists of renown in their particular field of activities and will be appointed within 15 days of the Administrative Office's having informed the member states that it would institute an arbitration proceeding.

The court will render its written decision within two months of the date its presiding judge is appointed, extendable for another 30-day period. The arbitration award will be decided by a majority vote. The voting will be confidential and dissident votes may not be Justified. Effects of the Award. The awards rendered by the Arbitration Court are unappealable, and will inure to the member states involved in the dispute with the force of res judicata. The awards must be effected immediately, unless otherwise established by the Arbitration Court. In the event any member state fails to comply with the arbitration decision within 30 days, the other member states may take temporary compensatory steps to cause compliance therewith. Any member state involved in a dispute has 15 days as from award notification to ask for any clarifications required. The Arbitrator Court will have 15 days to answer, and may stay award performance until a decision on the request is handed down.

Private Claims

There is a system applying to any claims made by private persons (natural persons or legal entities) as a result of any sanction or application of any legal or administrative steps with restrictive, discriminatory effects, or of unfair competition from any of the member states in violation of the Asuncion Treaty, the agreements executed under the scope thereof, Common Market Council decisions or Common Market Group resolutions. Procedure. Claims will be made before the National Section of the Common Market Group of the member state in which the claimant maintains a regular residence or business headquarters, providing sufficient evidence to permit the National Section to determine the veracity of the violation, threat or loss. After hearing the claimant, the National Section of the Common Market Group of the member state will make direct contact with the National Section of the Common Market Group of the member state charged with having violated the provision, or will forward the claim within 15 days of receipt to the Common Market Group, without further examination. Specialists' Summoning. After receiving the complaint, the Common Market Group will immediately call in a group of specialists that will decide whether there are grounds for the claim; this group will take no more than 30 days after appointment to do so. This group of specialists will be composed of three members designated by the Common Market Group. If an agreement is not reached, the specialists will be elected from a list of 24 specialists registered with the Administrative Office of the Common Market Group, with each member state's being entitled to elect six specialists of recognized competence in the matters under dispute. The expenditures resulting from activities performed by the group of specialists will be proportionally borne by the parties, as determined by the Common Market Group or, should they not reach an agreement, divided equally between the parties involved in the dispute. Specialists' Opinion. The group of specialists will submit their opinion to the Common Market Group. If according to this opinion it is found that there are grounds for the claim against the member state, any other member state may call for the adoption of corrective measures or annulment of the measures in dispute. Should this requirement not be complied with in 15 days, the member state calling for such measures may resort directly to the arbitration proceeding specified in item 4 above.

International Jurisdiction Over Contractual Matters

Scope

The rules on litigation jurisdiction over contractual matters will apply to disputes arising from civil or commercial international contracts between private-law legal entities or individuals provided that: They are domiciled or headquartered in different member states: At least one of the parties to the contract is domiciled or headquartered in any member state and, additionally, has made a choice of jurisdiction in favor of a court in one of the member states. In this case, there must be a reasonable connection between the jurisdiction chosen and the controversy. The scope of the application of the international jurisdiction guidelines over contractual matters excludes the following: Legal relationships between bankrupt entities/individuals and their creditors and any other analogous proceedings (especially concordatas composition with creditors); Matters under agreements involving family and succession law; Social security contracts; Administrative contracts; Employment contracts; Consumer sales contracts; Transport contracts; Insurance policies; and Rights in rem.

Choice of Jurisdiction

Courts in member nations to whose jurisdiction the contracted parties have agreed to submit the matter in writing will have jurisdiction to settle controversies stemming from civil or commercial international contracts.

Agreement of Choice

The jurisdiction can be agreed on at the time the contract is signed, during the life of the contract, or even when the dispute actually arises. The validity and effects of the choice of venue will be governed by the law of the member nations that normally have jurisdiction to hear the case, always resorting to the law most favorable to the validity of the contract. Whether or not jurisdiction is chosen, such jurisdiction will be prorogated in favor of the courts of the member state where the proceedings are in fact filed, provided the respondent voluntarily allows this in an affirmative and unfeigned way.

Subsidiary Jurisdiction

Should the contracted parties not reach an agreement regarding the courts competent to settle disputes, the member state chosen by the plaintiff of the case in point will have jurisdiction: The court of the place where the contract is to be performed; or The court of the domicile of the respondent; or The court of the domicile or headquarters of the claimant when the latter can show that it has done its part. For purposes of item (i) above the place of performance of the contract will be the member state where the obligations on which the claim is based have been or should be performed, taking into consideration the following: For contracts involving certain specific items, the place where they existed at the time of contract signing; For contracts involving specific items according to their type, the place of domicile of the debtor at the time of contract signing; For contracts involving fungible items, the place of domicile of the debtor at the time of conclusion of the contract; and For service rendering contracts: 

(a) If in regard to items, the place where they were at the time of contract signing;

(b) if effectiveness is related to any special place, the place where they were to produce effects: and

(c) in all other cases, the place of domicile of the debtor at the time of contract signing. For purposes of application of item (ii) above for determination of the domicile of the respondent in a contractual dispute involving individuals, the following will be taken into consideration: The habitual residence: On a subsidiary basis, the central place of business; and In the absence of any such considerations, the place where found, meaning the actual residence. When dealing with a legal entity, the determination of the domicile will be based on where the administrative headquarters have been set up. The claim plaintiff can, as an alternative, file in any of the places where the legal entity has branches, establishments, agencies or any other type of representation. Legal entities headquartered in any member state that have concluded contracts with any other member state can be sued in the courts of this latter state should there be any dispute as to the construction and application of the obligations regulated by contract. In the event there is a codefendant, a suit on contractual matters can be adjudicated with the courts of jurisdiction in the territory of the domicile of any of the parties to the litigation. Additionally, any claims entailing personal collateral rights or intervention of nonmember states in contractual obligations can be filed with the court hearing the main proceeding.

Counterclaims

In the event of there being a counterclaim based on any act or fact that served as the basis for the main proceeding, the courts hearing the main proceeding will be competent to hear any counterclaims that may arise.

Educational Integration

Scope

Based on the premise that education is a fundamental factor in the regional integration process, educational courses at the primary or junior high level--provided that they do not entail technical studies-- will be recognized by member states as being on the same level for all member nations. Likewise, in order to permit continuing education, certificates proving course conclusion issued by an official institution accredited in one of the member states will be valid in all other member states. Nontechnical primary and junior high level studies that have not been completed will be accredited by any member state, thereby allowing course conclusion in another member nation. Studies will be completed using an equivalency table to determine the level achieved.

Regional Technical Commission

In order to harmonize the mechanisms favoring accreditation of studies undertaken in any member nation in any other member nation, and to resolve any situations that may not be covered by the equivalency table, a Regional Technical Commission will be created. This Commission will include delegations from the ministries of education of each member nation, and will meet whenever at least two member states think it necessary to convene. The meeting sites will be established on a rotating basis. Any disputes that arise among the member states as a result of application, construction or noncompliance regarding the provisions related to education will be initially resolved by direct diplomatic negotiations. Should the countries not reach an accord or should the dispute be only partially resolved, then the procedures set forth in the Dispute Resolution System will be resorted to. Should the member nations enter into a bilateral convention or accord whose provisions are more favorable to their students, the member states in question can apply whichever provisions they consider most advantageous.

Reciprocal Promotion and Protection

Scope

The nations subscribing to the Asuncion Treaty consider that the creation and maintenance of conditions favorable to individual or corporate investments for the jurisdiction of one of the member states in the territory of another state is essential to intensify the economic cooperation targeted so as to accelerate the integration process among all four member states. In this context, Argentina, Uruguay, Paraguay and Brazil signed on January 1, 1994 in the city of Colonia del Sacramento, Uruguay, the Colonia Protocol for the Reciprocal Promotion and Protection of MERCOSUR Investments (Colonia Protocol). It was established in this protocol that investments under MERCOSUR by investors resident or domiciled in the territory of any member state will be entitled to treatment no less favorable than that accorded by the other member state to national investors or nonmember states.

Investors

For purposes of construction of the Colonia Protocol, investors are considered to be: Individuals that are citizens of any of the member nations or that reside there on a permanent basis or are domiciled there, with due regard for legislation prevailing in such territory; Legal entities organized pursuant to the legislation of one of the member nations that are headquartered there; and Legal entities organized in the territory where the investment is made, actually and directly or indirectly controlled by the legal entities or individuals mentioned above.

Investments

The term investment includes all types of assets such as: movable or immovable property, such as rights in rem and guarantee in rem rights; Shares, corporate holdings and any other type of corporate participations; Credit instruments and rights that may have an economic value; Intellectual property rights or materials, Including copyrights and industrial property rights such as patents, industrial drawings, trademarks, commercial names, technical procedures, know-how and goodwill; Economic concessions involving public law, such as research, cultivation, extraction or natural resource exploration concessions.

Freedom to Invest

The nation receiving the investment cannot avail itself of unjustified or discriminatory means capable of restricting the investor's freedom to manage, maintain, use, enjoy and dispose of its investments.

Tax Issues

The member states are not however obligated to extend to investors in the other nations signatory to the Colonia Protocol the benefits of any treatment, preference or privilege resulting from international accords relating fully or partially to tax matters.

Exceptions

In addition, the member nations can temporarily establish a list of exceptions where the new treatment will not yet prevail. In this way, the various member nations decided to except the following economic sectors: Argentina: ownership of real estate on the frontier strip, air transportation, naval industry, nuclear plants, uranium mining, insurance and fishery; Brazil: mineral prospection and mining; use of hydraulic energy; health care; television and radio broadcasting and telecommunications in general, acquisition or leasing of rural properties; participation in the financial intermediation, insurance, social security and capitalization systems; chartering and cabotage as well as inland navigation; Paraguay: ownership of real property on the frontier strip; communications, including radio and television broadcasting; air, sea and land transportation; electricity, water and telephone services; prospecting for hydrocarbons and strategic minerals; import and refining of petroleum derivates and postal services; and Uruguay: electricity; hydrocarbons; basic petrochemicals, atomic energy; prospecting for strategic minerals; financial intermediation; railways, telecommunications; radio broadcasting; press and audiovisual means.

Expropriation and Compensation

The member nations undertook to do nothing to nationalize or expropriate investments in their territories that pertain to investors from the signatory countries, unless such measures are taken based on public need. In such case, nothing discriminatory can be done, but everything must be implemented by due legal process. Compensation for the investment holder that is expropriated or nationalized should be both adequate and effective, and made in advance, based on the real investment value determined at the time the decision is publicly announced by the proper authorities. This payment will be updated until actual payment, and the affected investor will receive interest.

Transfers

The original member state investors will be ensured free transfer of their investments and any earnings thereon. These transfers can be made in freely convertible currency, using the exchange rate prevailing on the market pursuant to the procedures established by the member state receiving the investment. Member nations cannot adopt any exchange measures restricting free transfer of the funds invested or from activities exercised in their respective territories.

Argentina / Brazil Binational Companies

Argentina/Brazil Binational Companies (Binational Companies) were created and regulated by the Treaty for Establishment of Bylaws for Argentina/Brazil Binational Companies (Binational Company Bylaws), signed by the governments of both countries on June 6, 1990.

According to the Binational Company Bylaws, in order for a company to be considered binational and to qualify for the advantages attributed thereto, such company must comply with all the following requirements:

• At least 80% of the share and voting capital must be in the hands of investors that are nationals of Argentina and Brazil, ensuring them actual and effective control of the binational company;
• The participation of all national investors of each of the countries involved must be at least 30% of the corporate capital;
• The group of national investors from each country must be entitled to elect at least one member to each of the management entities and one member to the company's in-house monitoring board. In order to satisfy the above requirements, national investors are defined as: Individuals domiciled in Brazil or Argentina;
• Public-law corporate entities from either of the two countries; and
• Private-law legal entities from either of the two countries, in which the majority of the corporate and voting capital and the actual administrative and technological control are directly or indirectly held by the investors indicated in the above points.

The object of these companies can include any of the economic activities permitted under the legislation of the countries where they are headquartered, with due regard for the limitations established by constitutional provisions. Binational Companies can take any of the legal forms admissible under the legislation of the country chosen for the headquarters of the company (either Argentina or Brazil). The corporate objective of the company must mention the words Argentina/Brazil Binational Company or the initials E.B.B.A. or E.B.A.B. When the corporate form chosen is a joint-stock company, the corporate capital must be divided into registered shares that are not transferrable by endorsement. Additionally, transfer of shares and participations or assignment of quotas and other corporate capital changes entailing some modification of the corporate structure of the Binational Companies can only be implemented with the consent of the proper authorities in the country where the corporate headquarters are located. The Binational Companies established in any of the member states can establish in another member state branches or subsidiaries always with due regard for the legislation of the host country as to objectives, corporate types and registration.

The corporate capital of these Binational Companies can be paid up by contributions:

• in local currency;
• in freely convertible currencies;
• in capital goods of Argentine or Brazilian provenance, without exchange coverage in the host country;
• in capital goods originating from nonmember states, whenever these goods have entered Argentina or Brazil before July 6, 1990 or are incorporated into the capital of the Binational Company within two years as from the entry into effect of the Binational Company Bylaws; and
• in any other way permitted under Argentine or Brazilian legislation.

The governments of both countries will take such action as is required for capital transfers by conveyance of capital goods and equipment of Argentine and/or Brazilian origin, without exchange coverage in the host country, to be made without any tariff or nontariff restrictions of any kind. These bylaws target equation of Binational Companies with national companies in each and every member state. Therefore, it provides that companies formed thereunder will be eligible in the country where they operate, regardless of the composition of their capital, for the very same treatment accorded entirely domestic companies in relation to: Internal taxation; Access to internal credit; Access to incentives or advantages regarding national, regional or sectorial industrial promotion; and Access to public sector purchases and contracts.

Additionally, it was established that the goods and services produced by Binational Companies will enjoy priority status, and be tantamount to those of domestic companies with regard to implementation by both governments of bilateral undertakings developed to foster economic integration and cooperation. Another advantage that the bylaws afford is greater flexibility with capital transfers and respective transfers of funds between Argentina and Brazil, as well as entitling investors in these countries with holdings in a Binational Company headquartered in either country to freely transfer after paying any outstanding taxes the profits from their investment, provided that these profits are distributed proportionately among the investors, as well as to repatriate their holdings in the capital of the Binational Company, with due regard for the provisions applicable to each individual country. The branches and subsidiaries of Binational Companies set up in the other country will also have this same entitlement with regard to net profits.

The bylaws provide that, even in the event of exchange difficulties and foreign payments, the governments of both countries will not impose any restrictions on the free transfer of net profits earned in their joint undertakings. Finally, the bylaws provide that the governments of both countries will take such action as is necessary to facilitate international staff transfers for the Binational Companies, mainly with regard to ease of obtainment of authorization for permanent or temporary residency, and reciprocal accreditation of professional certificates and diplomas. The formation of Binational Companies in Brazilian territory requires the obtainment of a provisional certificate, and documentation issued by the Commercial Policy Office (an agency of the Ministry of Industry, Trade and Tourism). In order to obtain this, the investors in the Binational Company should submit the following documentation to this office: An agreement stipulating the conditions on which the Binational Companies will be organized and will operate, including obligatory information as to:

• Corporate objectives and program;
• Corporate capital structure;
• Name, nationality and domicile of the partners;
• Nature and value of the respective capital transfers;
• Distribution of administrative functions and duties among the investors in each country;
• Rules for distribution of the corporate results;
• Rules for commercial transactions between investors and the Binational Company;
• Preferential guidelines for sale of shares and capital increases;
• Rules on corporate liquidation: and
• Rules for controversy resolution including election of court for this purpose.
• Copy of the projected bylaws or articles of association for formation of the Binational Company. The provisional certificate is the instrument that allows for free intercountry transfer of the funds for any capital transfers mentioned on the certificates. When filing the acts of incorporation of the Binational Company at the commercial registry, it will also be necessary to submit this certificate. Once the acts are on file and the capital payment has been made, the Commercial Policy Office will issue the definitive certificate, which will ensure the benefits set forth in the Binational Company Bylaws, upon submission of the following documentation by the interested parties:
• Voucher showing filing of the acts of incorporation at the proper registry;
• Voucher as to payment of the corporate capital:
• Copy of the bylaws, agreement or articles of association or like document; and
• Certified statement from the directors or managing partners of the company, as the case may be, stating that the corporate capital composition meets the requirements set forth above.

Furthermore, whenever a private-law legal entity from either of the two countries participates, its legal representative must also submit a statement saying that the majority of the company capital and votes, as well as the actual administrative and technological control, are directly or indirectly held by private- or public-law legal entities from either of the countries. Subsequent to the issue of the definite certificate, the Commercial Policy Office will notify such issuance to the authorities in the Republic of Argentina designated to act as the investment authorities, and will have the decision published in the Official Gazette of the Federal Executive

The Commercial Policy Office will also be charged with keeping the Binational Company register updated with information on all companies formed in both Argentina and Brazil, monitoring the provisions of the bylaws of the Binational Companies by the companies headquartered in Brazil. Any infractions of these bylaws or Brazilian law committed by a Binational Company headquartered in Brazil could disqualify the company vis-à-vis the Commercial Policy Office, which would entail loss of the prerogatives set forth in the Binational Company Bylaws, without prejudice to any other legal measures that might apply.

Treaty to Avoid Double Taxation

Prior to entering into the Asuncion Treaty, Argentina and Brazil signed on May 17, 1980 a treaty intended to avoid a double tax burden with regard to investments made in either country, as well as to avoid tax evasion in income tax matters. This treaty took effect on November 7, 1982 (two years after execution), with an official exchange of the instruments of ratification approved by the governments of both countries.

As a result, since 1982 any income earned by Indviduals investors resident or headquartered in either country as a result of investments in the other country that is taxed in the contry of the investment is will be exempt from income tax in the country of residence of the investor.

Treaty of Acuncion and Protocol of Ouro Preto