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10 October 2018 Panama’s Minister of the Presidency proposes bill to amend the Panama Pacifico regime Panama’s Minister of the Presidency proposed to the National Assembly Draft Bill No. 664 of 2018 (20 August 2018), which would amend the Panama Pacifico (PP) regime to comply with Action 5 of the Base Erosion and Profit Shifting (BEPS) project of the Organisation for Economic Co-operation and Development (OECD). The PP regime currently grants income tax benefits to companies that engage in certain activities. The bill would limit eligibility for those benefits by limiting the activities eligible for preferential tax treatment under the PP regime. Specifically, the bill would remove the following activities: (1) rendering services to individuals or legal entities located abroad; (2) rendering high-added value services protected by intellectual or industrial property provisions; and (3) re-invoicing of goods that do not enter the Panamanian territory. Additionally, the bill would only allow multinational companies to claim benefits for rendering office administrative services, including: (1) direction, administration and/or support of operations; (2) strategic planning services and business development; and (3) technical assistance, technical support, logistics, and marketing. Multinational companies rendering these services would pay a 5% income tax rate on the related net taxable income. Panamanian recipients benefitting from these services would have to withhold 5% on the total service payment if: (1) the services were related to the generation of local income or the conservation of its source; and (2) the payment was considered a deductible expense by the recipient (i.e., ensuring that income is produced in Panama). The bill would allow the multinational company to claim a tax credit for the amounts withheld by the Panamanian taxpayers, as well as for amounts effectively paid abroad for services rendered to nonresidents. The company would, however, have to pay at least 2% of the net taxable income generated in Panama as a minimum income tax. Transitional provisions for services rendered abroad and office administration services (legal stability)The bill would provide transition rules for companies that benefit from legal stability (i.e., a guaranteed 10-year income tax exemption, among other things) and are currently registered in the PP regime as entities providing: (1) services to individuals or legal entities located abroad; or (2) office administration services to users within the PP area or established outside Panama‘s territory. Under the transition rules, companies would have the option to: Companies that do not select either option would still maintain their income tax exemptions for 10 years, beginning with the date they were registered in the PP Registry. The tax exemption would apply to the income generated from rendering services to the foreign market and the Panamanian market. However, the bill would impose value-added tax (VAT) on services provided to Panamanians. The bill would require companies that engage in certain activities to meet the following requirements to claim income tax benefits: (1) incurring an adequate amount of operating expenses in Panama related to the activity; and (2) having a certain number of full-time qualified employees. The activities listed in the bill would include: (1) radio, television, audio, video and data signal linking; (2) management of offices as a multinational company; (3) call centers; (4) capturing, processing, storage, switching, transmission and retransmission of data and digital information; (5) logistic and multimodal services; and (6) research and development of resources and digital applications for use in networks. This provision would apply beginning 1 July 2021. The bill would require companies to apply transfer pricing rules to their operations with related parties resident in Panama, abroad or under any other special regime. Also, transfer pricing rules would apply to individuals or legal entities with operations with related parties that are within the PP Area. The bill would clarify the VAT exemption that was already provided under the regime (i.e., on services rendered by companies registered under the regime to individuals or legal entities established abroad or within Panama and to companies registered under PP). Furthermore, the bill would include the same exemptions for property tax and property transfer tax under Law 66 of 2017, but those exemptions would be effective on the same day the bill is enacted, instead of 1 January 2019. 1. Source: “http://www.asamblea.gob.pa/proyley/2018_P_664.pdf.” Ernst & Young Limited Corp., Panama City
Ernst & Young, S.A., San José
Ernst & Young, LLP, Latin America Business Center, New York
Ernst & Young LLP (United Kingdom), Latin American Business Center, London
Ernst & Young Tax Co., Latin America Tax Desk, Japan & Asia Pacific
Document ID: 2018-6192 |
