What Role Does the Republic of Panamá play in the Economic Recovery of Latin America post COVID-19?

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ANTHONY  

Greetings and welcome to the YK law Interview Series where YK Law will discuss topics regarding post-pandemic foreign direct investment in Latin America and the Caribbean region.

YK Law is a co-managing member of the Yingke Global Legal Service Alliance, which is comprised of 83 of Yingke law firm’s offices in Midland China, with over 10,000 attorneys and 40 International firms practicing law throughout their 143 offices in 83 countries. YK Law is an exclusive Alliance member in the United States with offices in Dallas, Irvine, Los Angeles, and New York City.

The lawyers at YK Law possess diverse backgrounds and experiences and are not only committed to providing the highest quality legal services, but we are also committed to consistently meeting and exceeding the expectations of our clients. As the business interests of our clients are increasingly global, we also take a broader and more international approach to client service.

YK Law’s Latin America and Caribbean practice is based in Panama City, Panama, to capitalize on Panama’s unique position as the preferred logistics and commercial hub of the Americas and the preferred nexus for commerce between Latin America and Asia.

In this interview, we are honored to speak with Jeannette Diaz Granados, the Director of the Office of multinational corporation headquarters at the Ministry of Commerce and Industry for the Republic of Panama. We will discuss the unique role that the Republic of Panama will play in the economic recovery of the Latin America and Caribbean region post COVID-19 as the hub for e commerce logistics in the region.

Greetings Jeanette, and welcome. Thank you for taking the time to speak with us today.

JEANNETTE

Thank you very much, Anthony. Thank you for having me. It’s a real pleasure. And hopefully, I will bring you some insight of what pan was doing to attract foreign investment.

In the Ministry of Commerce as part of the of our responsibility is to develop and execute government policies to attract this foreign investment. So, in our direction, which is specifically the multinational headquarters regime, we manage to special regimes that are aiming towards attracting new companies to do to establish multinational headquarters here in Panama.

ANTHONY  

And can you tell us a little bit about your office, in particular, the Multinational Corporation Headquarters, or by the acronym “SEM” for the name and Spanish: Sedes de Empresas Multinacionales.

JEANNETTE

The Multinational Headquarters Office manages the SEM regime, which was created in 2007. And this regime has a purpose of attracting foreign investment into Panama, especially with the idea of, you know, making Panama more competitive, bringing a new knowledge to the companies that are here in Panama, and also trying to make Panama the platform to regionalize for companies that want to regionalize themselves in the region in the whole Latin American region.

So, with this idea in mind, the SEM regime offers the opportunity for companies to establish themselves and from here provides services to the Latin American region with certain activities that they’re permitted. And these activities are usually like back office of services. And it could be from, you know, regular administration operations, logistics, planning, engineering, constructing and also processing and diverse activities within the logistics center.

ANTHONY

Perfect. I think, you know, Panama City, Panama, you know, turned 500 years old on August 15, 2019, and is the oldest European settlement on the Pacific coast. And for five centuries, the Republic of Panama has connected the Atlantic and Pacific Oceans. And for more than a century, Panama has served as a major world center for international banking.

I think it might be helpful if we take a step back, Jeanette, and you please tell us what are the characteristics of Panama that have made the country a hub for international commerce in one of the fastest growing economies in Latin America and the Caribbean?

JEANNETTE

So, yes, thank you. Panama has a unique history as far as being always center for the transfer of goods and products going back historically, even though colonial times, and afterwards, during the railroad construction, and then the Panama Canal. So, Panama’s geography is definitely a blessing for commerce. And also the economy is dollarized.

So, you know, I have based the US based economy, definitely, that facilitates, and the growth of the financial center, united with, you know, hubs of hubs, we have the hub of air hub, with the network that Copa airlines provides, and other airlines traveling from Panama to all destination, and all hemispheres.

So we have that proximity to the market. As far as air connectivity goes, we you could go to the United States, and probably be there, you know, to the closest gateway in two hours, or be in the West Coast, probably in six hours. If we go to Asia, you’re probably doing one or two connections, but you’ll be arriving probably the next day. These are really advantages when you consider placing a regional headquarters office and when your top executives need to be traveling, or doing providing, you know, the business.

So, these are certain definitely advantages of apart from that it’s the quality of life. Panama is really a modern city, but at the same time, it has beautiful suburbs, the quality of life that your expat would be [experiencing] in Panama is, is you know, really very good quality. And I think these are really good attributes for companies that are thinking on, you know, placing their executives here in Panama.

So another I think important information is to know that Panama’s also hub for technology, we have seven sub oceanic cables that cross and converge in Panama. So, anything that has to do with telecommunication is really, is really something that’s enabling here through these conversion of the cables.

ANTHONY

No, I think that’s, you know, I think also notably, the volume of products imported from Asia to Panama reflect Panama’s unique position as a preferred nexus of commerce between Latin America and Asia. For example, the Georgia Tech Panama Logistics Innovation and Research Center has reported that in 2019, Panama imports from China and the ASEAN were approximately 1.2 million from China 258 million from Japan 196 million from South Korea. So we can see that those volumes, evidence Panama’s position as a nexus of commerce between Latin America and Asia.

Also, there is a significant amount of traffic into the Colon free zone to the tune of about $969 million and the Processing Zones at about a half of $500 million you know in those product flows reflect Panama’s various Free Trade Zones and its unique position as a preferred hub of international trade in the region.

You know, I’d like to talk a little bit about e-commerce. I mean small and mid-sized manufacturers and brand owners of consumer-packaged goods are seeking to quickly regain the levels of performance they experienced pre COVID-19. But retail markets across the globe are in the throes of an economic downturn caused by the coronavirus pandemic, the recovery from which may take years.

Our clients cannot wait for markets to recover fully. They are seeking solutions for near term revenue growth in retail markets for consumer-packaged goods. We advise our clients that a viable solution for small and midsize e-commerce e commerce companies in the Asian, China, the EU, and the USA is accessing new customers in Latin America and the Caribbean. Many consumer-packaged goods that are manufactured in foreign markets are not available in local markets in the Latin American and Caribbean region. Also, the prices charged by local brick-and-mortar retailers and e commerce companies that manage the logistics outside of Latin America are often prohibitively expensive, given that transaction costs are passed on to the consumer and that regional currencies are weak compared to the US dollar.

Jeanette, I have two questions in this regard. What investment regimes has Panama established to attract multinational companies to create regional headquarters in Panama, and how can these investment regimes benefit ecommerce companies that seek to consolidate cross-border logistics in the region?

JEANNETTE

Yeah, so in that respect, Panama has established two new regimes for multinationals. One of the regimes is the Multinational Headquarters Regime, and the other regime is the Multinational Headquarters for the Manufacturing and Operation. So, in this regard, Panama is enabling through the benefits of these regimes, the establishment of, you know, a regional office that can provide services to head offices and subsidiaries. Between the benefits that they could, they can provide through the EMMA Law, which is the manufacturing is the operation and the activities of logistics, and also manufacturing at all levels. When we’re talking about manufacturing, it could be assembling, it could be labeling, it can be ticketing, refurbishing, and also warehousing and also anything that has to do with innovation to the product and, and lab test. So, the platform that Panama provides through these regimes and the benefits that it also provides in boats of fiscal incentives, [immigration] and also in what is customs is really a beneficial for multinationals that want to regionalize their products, or want to have, you know, more export opportunities.

ANTHONY

You know, and the role of Panama several Free Trade Zones is critical to Panama’s role as a hub for international commerce in the region, a hub for logistics. Could you talk about the role of the Free Trade Zones, in particular in Panama, and what they the benefits they offer foreign investors, investors and companies?

JEANNETTE

So, we have different zones. We have a Free Zones, established here in Panama, and that permit the activity of manufacturing or labeling the incentives that they provide us on basically on reduced rate on income taxes, they have benefits for their personnel coming into the country.

But the special regimes that we offer are also strategic strategically located in different areas of the Republic. So, the Free Zone, the Colon Free Zone is in the Atlantic side, which is close to the Manzanillo Ports. And this enables for the products to have, you know, a quick tracking and also anything that has to do with customs and surveillance. It’s all under the infrastructure of, of the area of the special regime.

ANTHONY

The several investment regimes in the Free Trade Zones within Panama and enable Panama to overcome obstacles to economic growth. I think it’s safe to say that such, you know, obstacles such as an unfunded public customs, authority or onerous trade bureaucracies or burdensome local tax structures that cannot be reformed faster or thoroughly enough to capitalize on opportunities for meaningful growth. But our Free Trade Zones solve that problem because they have more flexibility in the way to respond to the needs of corporate investors.

EMMA in particular, will incentivize these foreign ecommerce companies to consolidate cross border ecommerce, ecommerce logistics in Panama. Consolidation of e-commerce will enable foreign companies to disintermediate which would allow them to control their business expansion into the region and, thereby, minimize the costs and the risks of entering into emerging markets.

Indeed, in in 2019, the global Center of Excellence, which is a collaboration between DHL and the Taiwan Ministry of Commerce and Industry published a white paper on e-commerce in Latin America. That benchmarks the strength of Panama, and other cities in the Americas that have traditionally served as logistics hubs in the region regarding readiness to serve as the preferred hub for growth of e-commerce in Latin America.

The Hub cities that were studied other than Panama were Houston, Los Angeles, Mexico City, Miami, Montevideo, Santiago de Chile and Sao Paolo. The benchmark study found that Panama is the preferred hub for growth of e commerce in Latin America with an overall benchmark score of 90%. Miami came in second with an overall benchmark score of 80%. The 90% score reflects the Panama brings to bear comprehensive set of capabilities and geopolitical advantages, rather than any one attribute.

Jeannette, I have two questions in this regard. EMMA appears to be a perfect example of the diverse and integrated investment regimes that Panama offers foreign investors. Is that a correct description of EMMA, number one? And number two, what are some of the examples of EMMA’s diverse scope of benefits, and integration with other investment regimes in Panama?

JEANNETTE

Yeah, so EMMA is actually a very innovative for regime, and it’s one of its kind because EMMA provides the possibility for the multinational to have a headquarter here providing the operation of manufacturing, the possibility of warehousing and distribution center, and also everything that has to do with innovation and research of the products.

Basically, what EMMA does is provide services to the head office or to the subsidiaries of the business group. And, and by command of the head office or the subsidiaries, it can provide any of the services that I described before.

So, it provides a platform, you know, for both product and logistics in a very, you know, centralized location, and it could be placed in anywhere of the Republic of Panama.

So, it has a possibility to use the infrastructures of the Special Economic zones like Panama Pacifico, Zona Franca, and Zona Libre.

The advantages also of EMMA is that it provides [immigration] support in a one-stop-shop. So, all the visas in for the expats and for technical support of the employees are all processed under the one-stop-shop of the Ministry of Commerce.

Additional to that, there’s benefits for the employees. They are exempt from income tax, from Social Security, and from education tax here in Panama. They’re able to import their vehicles and household goods. And there’s also a law that applies, which is Law 5044 [regarding] the stability of the law. And these are benefits that are really convenient for multinationals that want to, you know, be in a strategic position and also reduce cost.

ANTHONY

Now, we needed, I think we need to be clear that EMMA is an acronym that stands for the Special Regime for the Establishment and Operation of Multinational Companies for the provision of Services Related to Manufacturing. So, we kind of jumped past that definition. In that regard, could you just very quickly compare EMMA with SEM, which is a program for the attraction of multinational corporations to establish headquarters in Panama?

JEANNETTE

Sure, so SEM was the original regime that originated in 2007. And we had, it’s the best practice. And what we did was actually copycat some of the best practices that we learned from the multinational headquarters regime to this new regime that provides the activity of manufacturing.

So, the basic differences is basic on the activities that they are permitted. So, the SEM Regime offers everything that has to do with back-office activities. So, the multinational is able to provide services to their business group, as far as, you know, providing financial services, call centers, you know, planning, administration operation and everything that has to do with management. And also, it includes logistics.

However, with EMMA, you have the activity of manufacturing and all its levels, also the logistics, warehousing distribution center opportunities, and then you have also anything that has to do with innovation and research of the product.

So, it’s the main differences are in the activities. However, there are additional benefits for [the corporations that hold EMMA Licenses]. [The corporations that hold EMMA Licenses] are able to be located in any place of the national territory. So that includes, you know, also the special economic zones, including free zone, Panama Pacifico, the City of Knowledge. The other advantages, everything has to do with recycled products.  You’re able to, you know, you’re free of taxes with residuals. So, you could sell your residuals. And also, there is a component of the transfer of knowledge and the possibility of establishing study centers.

ANTHONY

So, is it, I think it’s accurate to say that EMMA incentivizes foreign ecommerce companies or can incentivize foreign ecommerce companies to console the cross-border manufacturing logistics in Panama by granting them tax, labor, and import incentives. And those tax savings and a direct-to-consumer business model could enable foreign e-commerce businesses to offer the buyer in the region, in a Latin American Caribbean region, a landed cost for their products that is competitive with local brands there.

Additionally, you know, Panama’s unique geopolitical attributes will enable ecommerce businesses to provide faster fulfillment times enable the provision of end-to-end services, for example, returns and replacements. And to provide higher quality of customer service.  The end result of EMMA will be gross revenues and higher profit margins for companies.

The various investment regimes in the Republic of Panama that you have discussed are created and governed by separate laws. And they offer different tax immigration and labor incentives.

Jeanette, could you for us explain what are the tax, immigration, and labor incentives for EMMA in particular?

JEANNETTE

Yeah, so EMMA has the advantage of a reduced income tax on service rendered of 5%. It also enables the multinational to start operation without the operation notice that most companies are required in here in Panama. They also have the exemption of any taxes or any, any taxes on imports of raw materials, machinery or any equipment that is required for the manufacturing. Even though they are they are subject to the capital gains regime, it’s at a fixed rate of 2%.

And, as far as every everything that’s has to do with [immigration] benefits, it’s a one stop shop. It’s a one stop shop. It’s all processed in our multinational headquarters office through the Ventanilla Unica [One-Stop-Shop], as we call it. And it’s the process of licensing. It’s the process of doing all the Visas for the foreign employee. And also anything that, any request or any other information that they need from any other entity in the government can be channeled through our office. Basically, the EMMA benefits are even further than those of the SEM due to the activity that [the corporations that hold EMMA Licenses] are producing and doing products and manufacturing.

ANTHONY

So, to be clear, there’s a 5% exemption from revenue income taxes. In the Republic, income taxes assessed by the Republic of Panama, for the first five years, is that correct?

JEANNETTE

It’s a flat rate of 5%. Once they establish here, after a fiscal year, they have six months to report, and any service rendered would be at a rate of 5%.

ANTHONY

Okay, and the ITBMS, the value added tax, there’s an exemption from that.  Is that correct?

JEANNETTE

That is correct. Anything. Everything that’s exported out of Panama does not have to pay ITBM.

ANTHONY

Okay. And there’s an exemption on the payment of dividend tax, complimentary tax, and branch offices taxes, is that correct?

JEANNETTE

Yes, it’s exempt from dividend, complementary and taxes on all branches.

ANTHONY

Okay, and a 2%. capital gains tax, which you mentioned.

JEANNETTE

[The corporations that hold EMMA Licenses] are not exempt there. It’s included in, I mean, they’re subject to the capital gain regime, but at a flat rate of 2%.

ANTHONY

Okay. The operation notice tax. How does how does that tax operate?

JEANNETTE

[The corporations that hold SEM and EMMA Licenses] are not required [to comply with] the operation notice. So, therefore, they don’t have to pay any tax. So, they operate under the special license that, is provided through the approval of the license.

ANTHONY

Okay. And we talked about an exemption for import taxes. You did mention that for all types of merchandise, products, and equipment used for the provision of services related to manufacturing, correct?

JEANNETTE

Correct.

ANTHONY

Okay. And the Visa and the immigration benefits. There’s a temporary personal Visa for a term of two years that can be extended. Is that correct?

JEANNETTE

They’re actually two weeks. There’s the visa for the permanent employee that’s for a five-year period and extendable. And then there’s the temporary Visa for two years and also extendable. This also includes dependents. The other benefit is that dependents are able to get a labor permit here in Panama. They need to, you know, provide all the documentation to the labor ministry; but it’s also processed through the one-stop-shop here and at the office.

ANTHONY

Okay, and work permits, what are the provisions that EMMA makes for work permits.

JEANNETTE

So, when you apply for the license, this includes the benefit of also the Visa for the for the purpose of your status here, but it also includes the permit for work. So, everything is processed through our office here at the Ministry of Commerce. And it’s basically simultaneous. So, we’ll have, we’ll have that customer service right here at the Ministry. We have an immigration office, and we’ll have also a clerk from the Ministry of Labor.

ANTHONY

Well, Panama, recognized over seven decades ago, the value of Free Trade Zones as an essential component of trade hub economy. In 1948, Panama created the Colon Free Zone, which is one of the oldest special economic zones and the world’s second largest. The Colon Free Zone is home for over 3,000 enterprises, most of which are focused on the re-export of breakbulk inbound shipments sent onwards to small and medium sized companies in the Americas. We’ve discussed here today, SEM, that investment regime, which was created in 2007, which has been a great success. There’s been, to date, approximately 167 multinational companies headquartered in Panama to send Is that correct?

JEANNETTE

We have 167. Yes. multinational headquarters established here in Panama. They’re from all different parts of the world. We have a lot of Asian also companies from the United States, Europe, Central America, Caribbean. So, it’s very diverse. It’s also a, you know, different types of activities that they manage, some are in the financial sectors, others are call centers, others are in the engineering. So, it’s very diverse. And that just comes to say that Panama, you know, is a product for all.

ANTHONY

Could you give you give us examples of some of the companies from different regions of the world who are headquartered here, some of the multinationals?

JEANNETTE

Sure, so we’re talking about from the United States we have, you know, Procter and Gamble, we have Dell. We also have three m, we have Philips, we have also from Asia, Sam Soon, LG, Huawei. We have also from the region, we have also Bimbo. So there’s from all over the world or worldwide.

ANTHONY

And Roche and Philips in the cost from Europe, or I think are some examples. All these companies are enjoying tax, immigration and labor incentives for their operations here in Panama.

So, Jeannette in closing, it is apparent that Panama’s investment regimes are perceived by foreign companies to be effective. However, Panama is a constitutional representative democracy, and the sustainability of these investment regimes fundamentally depends on their ability to prove the lives of Panamanians. Please give us some examples of some of success stories of Panama’s various investment regimes in terms of the impact on the Panamanian economy.

JEANNETTE

I think we have very good examples. We have examples with 3M that is now doing manufacturing here in Panama and have expanded their operations. Also, we have the excellent example of Dell, which has thousands of employees that are now Panamanians. We also have examples in Nestle. And I think the transfer of knowledge has come to say that, you know, Panamanians are every day getting, you know, high-level positions within these companies. So, I think it’s beneficial for the multinationals, you know, taking in, you know, nationals with, you know, that that have grown and, and many of them have also already been exported to other regions. So, I think that has to say that the commitment of the SEM Regime and the EMMA Regime is part of, you know, making Panama and its workforce more competitive.

ANTHONY

Okay. Well, thank you very much, Jeanette for your time today. We thoroughly appreciate it. This interview has been very informative, and YK Law and I look forward to working with you. And the Panamanian Ministry of Commerce and Industry in the furtherance of the business objectives of our clients in Latin America, and the Caribbean, thank you so much for your time.

JEANNETTE

Thank you, Anthony. And it’s been a pleasure. And we’re here to serve and if any questions regarding these regimes you’re more than welcome.

ANTHONY

Thank you so much.

End.

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