27 August 2018 Panama's Minister of Economy and Finance proposes bill for calculating income subject to preferential tax treatment under an IP regime The bill would apply to the City of Knowledge regime (COK regime) and any current or future preferential tax regimes that grant benefits for the transfer or exploitation of intangible assets (IP regimes). In addition, the bill would widen the scope of application of the transfer pricing rules under the Fiscal Code. Taxpayers that might benefit from an IP regime should monitor the progress of this draft bill. Panama's Minister of Economy and Finance has proposed to the National Assembly a bill (Draft Bill No. 654) that would establish the method for calculating income that is derived from the "transfer or exploitation" of intangible assets (IP assets) and subject to a tax exemption or preferential tax treatment. On July 11, 2018, the Cabinet Council authorized the Minister of Economy and Finance, through Cabinet Resolution No. 48 of 2018, to present to the National Assembly of Panama a bill that would amend the COK regime.1 Accordingly, on July 16, 2018, Panama's Minister of Economy and Finance proposed to the National Assembly the bill with the new calculation method, which is based on the nexus approach established under Action 5 of the Organization for Economic Cooperation and Development's (OECD) Base Erosion and Profit Shifting (BEPS) project. The bill would establish that taxpayers operating under a preferential tax regime that grants tax benefits or exemptions to income derived from the transfer or exploitation of intangible assets would only be able to access those benefits when the income originates from a qualifying intangible asset. In that case, the taxpayer would need to apply the formula established under this bill and comply with the rest of the bill's provisions (including tracking and documentation requirements), in order to access the tax benefit granted by the respective IP regime. Under the "nexus approach," as established by the OECD in the final report on Action 5 of the BEPS plan, the application of an IP regime would depend on the level of research and development (R&D) activities carried out by the taxpayer. To apply the nexus approach, the bill would establish a formula that calculates the amount of income that would benefit from the exemption or preferential tax treatment granted to a qualifying taxpayer under an IP regime as discussed later. Under the bill, the only IP assets that would benefit from a tax exemption or preferential tax treatment would be copyrighted software and intangibles protected by means of a patent or a registration. Marketing-related IP assets, such as trademarks, would be excluded from the scope of a qualifying intangible asset. The qualifying expenses related to the IP assets would be included in the determination of the ratio at the time they are incurred (i.e., qualifying expenses over overall expenses), regardless of the accounting or tax treatment. The bill would consider as a "qualifying expense" any expenses or costs incurred by a qualifying taxpayer in the execution of R&D activities within Panama, when said activities lead to the creation or improvement of a qualifying intangible asset. Qualifying expenses also would include any expenses from outsourcing the R&D activities to an unrelated party or a related party that renders its services within Panama. Furthermore, the bill would allow qualifying taxpayers to increase their qualifying expenses. The percentage of this uplift would be established by the Executive Branch, and in no case would exceed 30%. Therefore, to calculate income subject to a tax exemption or preferential tax treatment, the formula would be as follows: The overall expenditures would comprise, in addition to the qualifying expenditures, the acquisition costs of a qualifying intangible asset and any outsourcing payments made to a related party for R&D activities rendered abroad on behalf of the qualifying taxpayer and directly linked to the creation or improvement of a qualifying intangible asset. Those expenditures would be taken into account in the year in which they were incurred, regardless of their accounting or tax treatment. The bill would define "net income derived from the transfer or exploitation of qualifying intangible assets" as the positive difference between the income derived from the transfer or exploitation of qualifying intangible assets and the expenses, costs and losses that are attributable to that income, incurred during the same fiscal period. Net income would include income produced in Panama that is derived from the sale or transfer of a qualifying intangible asset, including royalties, capital gains and the portion of the sales price of a final product that is attributable to the embedded qualifying intangible asset. With regard to the losses associated with a qualifying intangible asset, the bill would establish that these losses must be kept separate from ordinary income and, therefore, may only offset income derived from the transfer or exploitation of qualifying intangible asset. The bill would require individual tracking and tracing (i.e., IP-by-IP basis) of qualifying expenditures, overall expenditures and income derived from the transfer or exploitation of qualifying intangible assets. The bill would, however, allow qualifying taxpayers to track the income and expenditures with the final product that has qualifying intangible assets embedded within it, if the taxpayer was unable to track each asset individually. The bill would authorize the Executive Branch to establish the documentation required to ensure adequate compliance with the tracking and documentation obligation. These documents would need to be held in Panama and at the disposal of the Panamanian tax administration when requested from the taxpayer. The bill would include a new provision in the Fiscal Code that establishes transfer pricing obligations for taxpayers that perform activities within a preferential tax regime, including taxpayers that have operations with related parties that are within a preferential tax regime. Document ID: 2018-1699 |
