Transparency of the Regulatory System
Tax, labor, environment, health, and safety laws do not directly impede investment in Guatemala. Bureaucratic hurdles are common for both domestic and foreign companies, including lengthy processes to obtain permits and licenses and receive shipments. The legal and regulatory systems are confusing and not transparent. Regulations often contain few explicit criteria for government administrators, resulting in ambiguous requirements that are applied inconsistently by different government agencies and the courts. While there is no apparent systematic discrimination against foreign companies in these processes, these inconsistencies can favor local firms that are more familiar with these challenges.
Public participation in the promulgation of laws or regulations is rare. In some cases, private sector or civil society groups are able to submit comments to the issuing government office or to the Congressional committee reviewing the bill, but with limited effect. There is no consistent legislative oversight of administrative rule-making. The Guatemalan Congress publishes all draft bills on its official website, but these are not made available for public comment. Last-minute amendments often are not publicly disclosed before congressional decisions. Final versions of laws, once signed by the President, must be published in the official gazette before taking effect. Congress publishes scanned versions of all laws that have been published in the official gazette.
The Guatemalan Congress passed the Law to Strengthen Fiscal Transparency and Governance of Guatemala’s Tax and Customs Authority (SAT) in July 2016, which included amendments to SAT’s Internal Law, the Tax Code, and other laws to allow SAT’s access to banking records for auditing purposes with a judge’s approval. The SAT is also analyzing methods to streamline various internal and external procedures.
International Regulatory Considerations
Guatemala is a member of the Central American Common Market and as such adopted the Central American uniformed customs tariff schedule. As a member of the WTO, the GoG notifies its draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT). The Guatemalan Congress approved the WTO’s Trade Facilitation Agreement in January 2017, which entered into force for Guatemala on March, 8, 2017. Guatemala classified 63.9 percent of its commitments under Category A, which includes commitments to be implemented upon entry into force; 8.8 percent under Category B, which includes commitments to be implemented between February 2019 to July 2020; and 27.3 percent under Category C, which includes commitments to be implemented between February 2020 and July 2024.
In 1996, Guatemala ratified Convention 169 of the International Labor Organization (ILO 169), which entered into effect in 1997. Article 6 of the Convention requires the government to consult indigenous groups or communities prior to initiating a project that could affect them directly. Potential investors should determine whether or not their investment will affect indigenous groups and, if so, request that the GoG lead a consultation process in compliance with ILO 169. The Guatemalan Congress is currently considering a draft law to create a community consultation mechanism to fulfill its ILO-mandated obligations.
Legal System and Judicial Independence
Guatemala follows the civil law system. Codified Judicial Branch Law stipulates that jurisprudence or case law is also a source of law. Guatemala has a written and consistently applied Commercial Code. Contracts in Guatemala are legally enforced when the owner of a property right that has been infringed upon files a lawsuit to enforce recognition of the infringed right or to receive compensation for the damage caused. The civil law system allows for civil cases to be brought before, after, or concurrently with criminal claims. Guatemala does not have specialized commercial courts, but it does have civil courts that hear commercial cases and specialized courts that hear labor or tax cases.
The judicial system is designed to be independent of the executive branch, and the judicial process for the most part is procedurally competent, fair, and reliable. There have been accusations of corruption within the judicial branch.
Laws and Regulations on Foreign Direct Investment
More than 200 U.S. firms as well as hundreds of foreign firms have active investments in Guatemala. CAFTA-DR established a more secure and predictable legal framework for U.S. investors operating in Guatemala. Under CAFTA-DR, all forms of investment are protected, including enterprises, debt, concessions, contracts, and intellectual property. U.S. investors enjoy, in almost all circumstances, the right to establish, acquire, and operate investments in Guatemala on an equal footing with local investors. The U.S. Embassy in Guatemala places a high priority on improving the investment climate for U.S. investors. Guatemala passed a foreign investment law in 1998 to streamline and facilitate foreign investment. The GoG continues to work on legislative reforms aimed at supporting economic growth and closing regulatory loopholes that become barriers to investment. In order to ensure compliance with CAFTA-DR, the Guatemalan Congress approved in May 2006 a law that strengthened existing legislation on intellectual property rights (IPR) protection, government procurement, trade, insurance, arbitration, and telecommunications, as well as the penal code. An e-commerce law was approved by Congress in August 2008, which provides legal recognition to communications and contracts that are executed electronically; permits electronic communications to be accepted as evidence in all administrative, legal, and private actions; and, allows for the use of electronic signatures. Online payments outside of the formal financial sector, however, are not regulated.
The United States has filed two separate cases regarding concerns with the GoG’s adherence to its CAFTA-DR obligations. For a labor law case, an arbitral panel was established, pursuant to CAFTA-DR procedures, to consider whether Guatemala met its obligations to effectively enforce its labor laws. The arbitral panel held a hearing in June 2015 and issued a decision favorable to Guatemala in June 2017. Regarding an environmental case, the CAFTA-DR Secretariat for Environmental Matters was required to suspend its investigation in 2012 when the GoG provided evidence that the relevant facts of the case were under consideration by Guatemala’s Constitutional Court. The court dismissed the case on procedural grounds in 2013.
Complex and confusing laws and regulations, inconsistent judicial decisions, bureaucratic impediments and corruption continue to constitute practical barriers to investment. According to the World Bank’s Doing Business Reports for 2015 and 2016, Guatemala made paying taxes easier and less costly by improving the electronic filing and paying system (“Declaraguate”) and by lowering the corporate income tax rate. The GoG developed a website that is useful to help navigate the laws, procedures and registration requirements for investors (http://asisehace.gt/), which provides detailed information on laws and regulations and administrative procedures applicable to investment, including the number of steps, name, and contact details of the entities and persons in charge of procedures, required documents and conditions, costs, processing time and legal grounds justifying the procedures.
Companies that carry out export activities or sell to exempted entities have the right to claim value added tax (VAT) credit refunds for the VAT paid to suppliers and documented with invoices for purchases of the goods and services used for production. During the past few years, local and foreign companies experienced significant delays in receiving their refunds. Guatemala’s Tax and Customs Authority (SAT) began implementing a new plan in 2017 to streamline the process and expedite VAT credit refunds.
As part of its 2012 income tax reform, the GoG began implementing transfer pricing provisions in 2016.
Competition and Anti-Trust Laws
Guatemala does not currently have a law to regulate monopolistic or anti-competitive practices. The GoG agreed to approve a competition law by November 2016 as part of its commitments under the Association Agreement with the European Union. The GoG submitted a draft competition law to Congress in May 2016, but it was still pending approval by Congress as of April 2018.
Expropriation and Compensation
Guatemala’s constitution prohibits expropriation, except in cases of eminent domain, national interest, or social benefit. The Foreign Investment Law requires proper compensation in cases of expropriation. Investor rights are protected under CAFTA-DR by an impartial procedure for dispute settlement that is fully transparent and open to the public. Submissions to dispute panels and dispute panel hearings are open to the public, and interested parties have the opportunity to submit their views.
The GoG maintains the right to terminate a contract at any time during the life of the contract, if it determines the contract is contrary to the public welfare. It has rarely exercised this right and can only do so after providing the guarantees of due process.
In June 2007, a U.S. company operating in Guatemala filed a claim under the investment chapter of CAFTA-DR against the GoG with the International Centre for Settlement of Investment Disputes (ICSID Convention). The claimant alleged the GoG indirectly expropriated the company’s assets through a breach of contract. The company requested USD 65 million in compensation and damages from the GoG. The ICSID court issued its ruling on this case in June 2012 and stated that the GoG had in fact breached the minimum standard of treatment under Article 10.5 of CAFTA-DR and required the GoG to pay an award of USD 14.6 million. The GoG paid the award in November 2013.
ICSID Convention and New York Convention
Guatemala is a signatory to convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention), the Inter-American Convention on International Commercial Arbitration (Panama Convention), and is a member state to the International Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention).
Investor-State Dispute Settlement
CAFTA-DR incorporated dispute resolution mechanisms for investors. Over the past ten years, two investment disputes involving U.S. businesses were filed under the investment chapter of CAFTA-DR against the GoG with the ICSID – one in 2007 and the other in 2010. A Spanish firm filed a claim with the ICSID in 2009 on the same case filed by the U.S. investor in 2010. The first claim under the agreement was filed in June 2007 and the status of that case is described under the Expropriation and Compensation section of this report.
In October 2010, a U.S. company operating in Guatemala filed the second claim against the GoG with the ICSID. The claim seeks to resolve a dispute against the GoG regarding the regulation of electricity rates and the eventual sale of the company. In 2013, ICSID’s arbitral tribunal issued its judgment and awarded the company over USD 21 million in damages over electricity rates and USD 7.5 million to cover legal expenses. In 2014, the GoG filed an appeal to have the 2013 award annulled. On the same date, the company also filed for a partial annulment of the award. The ICSID ad-hoc committee issued its decision on both annulment proceedings in April 2016. The company then filed a request to resubmit the dispute over the sale to a new tribunal in October 2016. The new ICSID tribunal was constituted in February 2017. The company filed a memorial on the merits in September 2017, and the GoG filed a counter-memorial on the merits in February 2018. The case remains pending before the ICSID as of April 2018.
International Commercial Arbitration and Foreign Courts
Guatemala’s Foreign Investment Law also allows alternative dispute resolution mechanisms, if agreed to by the parties. Currently, there are two alternative dispute resolution mechanisms available in Guatemala to settle disputes between two private parties: the Center of Arbitration and Conciliation of the Guatemalan Chamber of Commerce (CENAC) and the Conflict Resolution Commission of the Guatemalan Chamber of Industry (CRECIG). Both dispute resolution centers provide support with arbiters and logistics. Guatemala’s Arbitration Law of 1995 uses the U.N. Commission on International Trade Law (UNCITRAL) Model Law as the basis for their rules on international arbitration. The subsequent enforcement of arbitral awards is recognized under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention), of which Guatemala is a signatory. The Law of the Judiciary recognizes judgments of foreign courts, but judgments must be final and comply with a legalization process to corroborate validity of the judgment.
Guatemala does not have an independent bankruptcy law. However, the Code on Civil and Mercantile Legal Proceedings contains a specific chapter on bankruptcy proceedings. Under the code, creditors can request to be included in the list of creditors; request an insolvency proceeding when a debtor has suspended payments of liabilities to creditors; and constitute a general board of creditors to be informed of the proceedings against the debtor. Bankruptcy is not criminalized, but it can become a crime if a court determines there was intent to defraud. According to the World Bank’s 2018 Doing Business Report, Guatemala ranked 153 out of 190 countries in resolving insolvency. The National Competitiveness Program (Pronacom) is currently developing a draft bankruptcy law. The Guatemalan banking superintendence implemented a credit bureau named Risk Information System as required by the Banking and Financial Groups Law approved in 2002. The system receives information provided by supervised banks, financial institutions, off-shore banks, and credit card companies. Only banks, financial groups, and other institutions conducting financial intermediation that have been approved by the Monetary Board can access information from the Risk Information System.