December 13, 2017 European Union includes Panama on its list of non-cooperative jurisdictions for tax purposes Although Panama has been included on the EU's non-cooperative jurisdictions list, transactions with Panamanian companies should not be immediately affected. On December 5, 2017, the Council of the European Union (the Council) included Panama on its list of "Uncooperative jurisdictions for tax purposes." The Council also published its conclusions in a document titled "Responding to the challenges of taxation of profits of the digital economy," noting that it (the Council) "looks forward to appropriate [European] Commission proposals by early 2018." The Council also indicated that it "takes the view that an appropriate nexus in the form of a virtual permanent establishment, together with any necessary corresponding amendments to the rules of transfer pricing and profit attribution, which would take into account where value is created in the different business models of the digital economy, should be explored." Criteria for the list and inclusion of Panama The Council uses three criteria for determining whether a jurisdiction belongs on the list. Those criteria are: (i) tax transparency (i.e., standard on fiscal transparency), (ii) fair taxation (i.e., not having any preferential tax measures that could be regarded as harmful) and (iii) implementation of anti-BEPS standards. The Council included Panama on the list as a result of the second item. According to the list, Panama has a harmful preferential tax regime and did not clearly commit to amending or abolishing the regime by December 31, 2018. Moreover, the list states that the Council will monitor Panama's commitment to amend or abolish other harmful tax regimes. The Council stated that the results of the reviews performed by the OECD will be taken into account later. Therefore, it is reasonable to conclude that the preferential regime that caused the Council to list Panama as a non-cooperative jurisdiction for tax purposes is not one of the regimes that was reviewed by the OECD's Forum of Harmful Tax Practices, i.e., Headquarters (SEM) regime, Panama-Pacifico regime, City of Knowledge regime and Colon Free Trade Zone. The Code of Conduct Group will revise the list once a year and the EU Council will approve any changes. As part of the review process, the Code of Conduct Group will send a report to the Council at least once a year. The Code of Conduct Group will prepare an interim report by mid-2018 to assess the progress made by the jurisdictions on the list. Implications for Panama as a listed jurisdiction For the list to be binding on Panama, it must be approved through a directive or regulation, which then must be approved by the Council, the European Commission and the EU Parliament. However, the list was only issued and approved by the Council as a document with recommendations. EU member states may include Panama in their lists of non-cooperative jurisdictions for tax purposes under their domestic laws and may apply defensive measures. Recommended defensive measures The jurisdictions that appear on the list are strongly encouraged by the European Commission to make the changes requested of them. Pending such changes, the Council notes in its conclusions that member states could consider applying one or more defensive measures, including both taxation measures and measures outside the field of taxation, aimed at preventing the erosion of their tax bases. The conclusions do not require EU member states to impose any of the suggested defensive measures, but the Council states that many may choose to do so, especially those that already operate national-level blacklists. According to Annex III of the conclusions, member states should apply at least one of the following administrative measures in the tax area: — Reinforced monitoring of certain transactions Member states also may apply the following defensive measures of a legislative nature in the tax area: — Non-deductibility of costs Additionally, member states could consider using the EU list of non-cooperative jurisdictions for tax purposes as a tool to facilitate the operation of relevant anti-abuse provisions, when implementing Council Directive (EU) 2016/1164 of July 12, 2016, which lays down rules against tax avoidance practices that directly affect the functioning of the internal market. In accordance with the Directive, member states, when transposing CFC rules into their national law, use "black" lists of third countries, and the Council suggests such lists could cover at least the jurisdictions listed in the EU list of non-cooperative jurisdictions for tax purposes. Such "black" lists are already in use in a number of jurisdictions globally, including Belgium, Brazil, Italy, Mexico and Spain. Final comments The list is not binding on EU member states. As such, there should not be any direct or immediate impact on transactions with Panamanian entities. Panama has been included on the list only as a result of a preferential regime that is considered to be harmful (under the criteria of the Code of Conduct of the EU). This regime is not related to any of the regimes that have already been reviewed by the OECD (Multinational Headquarter's (SEM), Panama Pacifico, City of Knowledge, Colon Free Trade Zone). It is possible that the Government of Panama will modify the preferential regime to allow Panama to be removed from the list. ———————————————
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