15 August 2018 Panama's Minister of Commerce and Industry proposes bill to amend multinational headquarters regime The draft bill would eliminate the income tax exemption granted to companies with multinational headquarters licenses, establish a reduced income tax rate and include substantive requirements for obtaining the license. Taxpayers that might benefit from the multinational headquarters regime should continue to monitor the progress of this draft bill. Panama's Minister of Commerce and Industry has proposed to the National Assembly a draft bill (Draft Bill No. 657) that would amend the multinational headquarters regime (MHQ regime) to comply with Action 5 of the Base Erosion and Profit Shifting (BEPS) project of the Organisation for Economic Cooperation and Development (OECD). On October 16, 2017, the OECD issued the Harmful Tax Practices — 2017 Progress Report on Preferential Regimes, in which it noted that Panama's MHQ regime was in the process of being amended. Since October 31, 2016, Panama has been a member of the Inclusive Framework of BEPS. As such, it is committed to complying with the minimum standards of the BEPS Action Plan, including Action 5 on Harmful Tax Practices. As a result of the MHQ regime reviews carried out by the OECD's Forum on Harmful Tax Practices, the Panamanian government has worked on a draft bill to amend the current MHQ regime, in order to comply with Action 5 of BEPS and improve Panama's competitiveness. On June 26, 2018, the Cabinet Council authorized the Minister of Commerce and Industry, through Cabinet Resolution No. 38 of 2018, to present to the National Assembly of Panama a draft bill to amend the MHQ regime. Accordingly, on July 24, 2018, the draft bill, identified as Draft Bill No. 657, was formally submitted for evaluation and approval before the National Assembly. The draft bill would authorize the Executive Branch to determine the minimum of full-time employees and the amount of operational expenses required to obtain an MHQ license, which could not be lower than the thresholds established by the draft bill — five full-time employees and at least USD 500,000 in operational expenses. The draft bill would establish a transition period until June 30, 2021, for companies that already have an MHQ license to adjust their structures to comply with the new requirements. For companies with an MHQ license, the draft bill would eliminate the income tax exemption and establish an income tax rate of 5% on the net taxable income derived from the rendering of services. Likely, Panamanian taxpayers benefitting from services or acts rendered by a company with an MHQ license would be obligated to withhold 5% on the total sum to be paid, as long as these services or acts were related to the generation of local income or the conservation of its source, and the payment was considered a deductible expense by that Panamanian taxpayer. The draft bill would allow the company with an MHQ license to claim a tax credit for the amounts withheld by the Panamanian taxpayers, as well as those effectively paid abroad for services rendered to nonresidents. However, the company would have to pay at least 2% of the net taxable income generated in Panama, as a minimum income tax. Moreover, companies with an MHQ license would be obligated to withhold 5% on 50% of the payments remitted abroad for services and acts received by nonresidents. The company also would have to withhold 5% on interest, commissions and other charges generated by loans granted by a nonresident and used in Panama. The draft bill would subject transactions carried out by companies with an MHQ license and its related parties domiciled in Panama, abroad or under a preferential regime in Panama to the transfer pricing rules established in the Panamanian Fiscal Code. Furthermore, the draft bill would automatically apply legal stability for investments by companies with an MHQ license (i.e., such companies would be guaranteed a tax rate for a certain period). Companies that already have this legal stability for investments would be exempt from the payment of income tax until that legal stability expires. The draft bill would continue to allow an exemption on dividend tax, complementary tax and branch tax, regardless of the source of the income (local, foreign or exempt). The draft bill also would allow an exemption from operation notice tax (i.e., annual tax on equity, similar to a commercial license) and the obligation of having a fiscal printer. The current capital gains tax regime established in the Panamanian Fiscal Code would apply to transactions performed by companies with an MHQ license; the draft bill, however, would establish a reduced rate of 2%, which would reduce the buyer's withholding obligation to 1% of the purchase price. The 1% withheld by the buyer would be treated as capital gains tax paid in advance. The draft bill would include immigration aspects as well, such as clarifying that the salary received by an employee with an MHQ Permanent Personnel Visa would be exempt from income tax, social security contributions and educational insurance in Panama. Moreover, these employees would be exempt from the payment to the Interest Compensation Special Fund (Fondo Especial de Compensación de Intereses - FECI) on housing loans granted and used in Panama. Employees with an MHQ Permanent Personnel Visa could opt for a permanent residence in Panama and keep working for a company with an MHQ license. Those employees, however, would be subject to income tax, social security contributions and educational insurance on the salary they receive. To improve the competitiveness of the MHQ regime, the draft bill would expand the financial activities allowed to include multinational groups in the banking, financial and securities industry, among others. Therefore, the draft bill would allow the following activities: financial management, risk analysis, due diligence, document custody and recordkeeping, document processing centers and corporate financial services. Document ID: 2018-1636 |
